Foreign Exchange: US-China Trade Deal To Be Signed, But Are Currency Markets Now In A Bubble? – Exchange Rates UK

This should help the economy going forward, but as things stand currently, the huge stock market gains seem out of sync with reality.

Improved sentiment and rate cuts may be creating a bubble.

– The Pound to Euro exchange rate is -0.11% lower @ €1.16893 today (15/01/2020)

– The Pound to US Dollar exchange rate is -0.1% lower @ $1.30079 today (15/01/2020)

Foreign exchange markets are almost completely flat to start Wednesday’s session with global stock markets and currencies unchanged and only gold making a tentative recovery with a 0.4% gain after recent heavy falls. The apparent calm comes despite what will go down in history as a very important event scheduled for later in the day as the US and China are due to sign the phase-one trade deal. This represents the beginning of the end of the trade war and over two years of negotiations and tit-for-tat tariffs which hurt not only the US and China but global trade. While the deal will not immediately heal all the damage already done and is only really papering over the cracks, it does mark the de-escalation and could lead onto a phase-two deal in the next year or so. It has also lifted market sentiment and the huge stock rally we have seen over recent months can mostly be attributed to this deal. Here’s Danske Bank with more details,

“The signing ceremony is scheduled to take place in the White House at 17:30 CET. The 86-page agreement will also be released today. The US and China have said that now the phase 1 trade deal has been finalised, they will get started with phase 2. We think those negotiations are going to be more complicated and think there is a 50% chance of a permanent deal ahead of the US presidential election. The good news is that we have gone from a period with trade war escalation to now de-escalation and we do not think US President Trump dares to U-turn again, as the trade war was hurting the US economy, in particular the to him very important manufacturing sector, hence damaging his re-election chances.”

This also means the Federal Reserve will have little reason to cut rates unless the economy deteriorates or the US dollar strengthens too much. If data actually starts to improve we may even see a shift back to a hiking bias later this year as the Fed itself labeled the cuts in 2019 as a ‘mid-cycle adjustment,’ implying the rate hike cycle was not concluded. Feeding into this decision could be the continued rally in US stock indices which have gained around 40% since the lows made in December 2018. Stocks such as Apple (AAPL) have rallied over 120%, yet corporate earnings have not kept pace and the S&P500 is actually in an ‘earnings recession’ or negative growth. This could start to concern the Fed as it looks to contain what could turn into yet another bubble, one of their creation with so many rate cuts in 2019.

No Support for Pound Sterling

With the Fed likely on hold and perhaps even shifting to a hiking bias later in the year, it is no surprise to see the GBP USD exchange rate falling as the chances of a BoE rate cut as soon as this month have risen to 50%.

GBP/USD has dropped into 1.3, over 500 pips lower than its pre-election high and the trend looks to have shifted to a downtrend, or at least a corrective decline. Positioning has not helped either as ING report,

“With GBP/USD speculative positioning turning sharply over recent months – from net shorts (close to 40% of open interest) in mid-September 2019 to net longs (8% of open interest) currently – the downside risk to GBP is building. Bar a possible rate cut, the uncertainty about the EU-UK trade deal (to be reached this year) should also limit GBP upside throughout the first half of the year.”

Upcoming data, especially employment data next week could help shift the situation and keep the BoE on hold, but with positioning now net long, rallies are likely to struggle until the correction has run its course and a new uptrend sets up later in 2020.