Dollar rallies on hopes of US-China trade breakthrough

iscussions between the US and China are set to continue in Washington in the coming days, with market participants hopeful that some form of compromise can be reached. China has sent its largest delegation of negotiators yet out of all thirteen rounds of discussions, sparking optimism among traders that progress towards a deal can be struck at some point before the week is out.

The rest of the week bodes to be a hectic one, both in terms of trade and monetary policy headlines. Tonight will see the release of the FOMC’s September meeting minutes. Given that the meeting took place before last week’s downturn in US PMI data, we think that the tone of the communications are likely to be more upbeat than they would have been had the meeting taken place today. That being said, investors will still be looking for signs that some of the more neutral members of the committee are erring towards additional interest rate cuts this year.

Negative Brexit headlines sink the pound

Sterling was the big loser out of the G10 currencies yesterday, with the GBP/USD cross shedding over three-quarters of a percent and falling briefly back below the 1.22 mark on some negative Brexit headlines.

According to reports, talks between the UK and European Union are close to breaking down just three weeks before the UK is scheduled to leave the bloc. Irish PM Leo Varadkar stated yesterday that there were still ‘big gaps’ between the two sides and that getting a deal over the line before the end of October deadline would be ‘very difficult’.

While investors are already heavily pricing in the likelihood that the pending deadline is delayed by another three months, this week’s headlines suggest that getting a deal, regardless of timing, will prove incredibly difficult.

Is Germany heading for a technical recession?

Activity in the Euro Area has been relatively quiet so far this week, with news out of trade talks and Brexit largely stealing the show.

We did, however, have some pretty dire industrial production numbers out of Germany on Tuesday. Activity in the German industrial sector fell even further into negative territory in August, contracting by 4.0% after investors had eyed a rebound to -2.7%. This ensures that the sector has now contracted in each of the last ten months and provides yet another sign that Europe’s largest economy likely entered into a recession in the third quarter of the year. Investors will, however, have to wait until the 14th November to find out, when the preliminary official GDP numbers for Q3 are released.