ptimism broke out on two key fronts: Brexit negotiations and the US-China trade conflict. Risk assets worldwide rallied sharply as a result, led in currency markets by the pound and most emerging market currencies. The conspicuous exception was the Turkish lira, which dropped sharply after the Turkish incursion in Syria.

The spotlight this week will remain squarely on Brexit developments. The European Union Summit on Thursday and Friday provides a chance for a last-ditch deal before the 31st October deadline. However, we still expect that a postponement and a general election will be needed. There is not a lot of news in the economic calendar, with EU industrial production on Tuesday perhaps the most important data point for this week.

GBP

The apparent breakthrough in Brexit negotiations late in the week brought a surge of optimism to currency markets and sent sterling shorts scrambling to cover. Mixed economic data, namely poor retail sales and better-than-expected monthly GDP, were largely ignored in the wake of this news.

European Union sources tried to cool down expectations over the weekend, but the odds of a no-deal Brexit on 31st October have dropped to around 12% in betting markets. We remain of the view that a postponement and general election will be necessary, but merely ruling out the no-deal option warrants further upside in the Pound, closer to 1.28 on the dollar.

EUR

Softish economic data out of Germany and France did not have any discernible impact on the common currency last week. The euro instead benefited from the general optimism after the apparent breakthrough in the US-Chinese talks and was able to eke out modest gains against the US dollar.

Eurozone industrial production, normally a sleepy second-tier number, could provide some volatility this week, particularly if it surprises to the upside and breaks the bearish mood surrounding the European economy. Aside from that, there are numerous speeches from ECB members that may shed light over the lack of consensus in the central bank regarding the latest round of policy easing.

USD

A thoroughly mixed set of economic data last week had little impact on the US dollar. Inflation for September came out a touch softer than expected, but consumer confidence surprised to the upside.

Meanwhile, the FOMC minutes for the last Fed meeting added little new information. It looks like the US dollar will continue to slowly tread water as relief over the US-China truce buoys risk assets, at least until the next Fed meeting on 30th October.