European stock markets closed higher yesterday as traders remained hopeful that Brussels will greenlight a Brexit extension.
A delay to the UK exiting the EU isn’t a long-term practical solution, but traders are likely to remain upbeat as the possibility of a no-deal Brexit seems to be greatly reduced. Dealers care about continuity, and a little can-kicking shouldn’t distort sentiment too much.
After the end of the European trading session, Prime Minister Johnson expressed his desire to hold a general election on 12 December. Mr. Johnson wants to clear house plus consolidate power, but he needs two-thirds of MPs to support in order to peruse his plan. Boris is bullish, but the Labour Party doesn’t seem that keen to go head to head with the Tories, presumably because they are performing poorly in the polls. The SNP might not be too eager to support a general election either as the recent Progress Scotland survey pointed to a minority of Scots supporting independence.
There were further developments in the US-China trade dispute. Beijing offered to buy $20 billion worth of US agricultural goods in year one if the Trump administration agrees on a partial trade deal. Mike Pence, the US vice president, took a reasonably firm line with China in his speech yesterday. The US politician criticized Beijing’s handling of the situation in Hong Kong, but he also made it clear that if China ends its ‘unfair’ trade policies, the US will be ready for a new trading relationship. Mr. Pence is known to be a hawk in relation to China, but the update wasn’t too tough. The S&P 500 posted modest gains last night.
Yesterday we saw the final press conference from Mario Draghi as chief of the ECB. There was nothing too surprising from the update. The central banker expects headline inflation to slide, plus he feels that economic risks still remain to the downside. The policymaker made a few calls in relation to fiscal policy, as he urged national governments in the euro area to expand the fiscal policy to assist the currency bloc. Seeing as the ECB will kick-off a new quantitative easing (QE) scheme worth €20 billion per month next month, I suspect many politicians in Continental Europe would rather wait-and-see how the new QE plan goes before alerting taxes plus public spending.
The latest PMI reports from Europe showed a slight overall improvement in economic activity in the area. The French manufacturing and services reading were 50.5 and 52.9, respectively, while economists were expecting 50.2 and 51.6, respectively. The German manufacturing PMI report was 41.9, which was a slight improvement in the 10-year low reading last month. The services sector in Germany is still expanding, albeit at a slower pace as the reading cooled to 51.2 from 51.4. With weak PMI readings, you can see why Mr. Draghi called for fiscal stimulus.
At 9 am (UK time), the German Ifo business climate will be posted, and economists are expecting a reading of 94.5, which would be a slight dip from the 94.6 reading in September. Keep in mind the August reading of 94.3 was the lowest since early 2010.
EUR/USD – has been driving higher since the start of the month, and a break above 1.1200 might put 1.1249 on the radar. A break below the 1.1100 regions, might bring the 50-day moving average at 1.1033 into play.
GBP/USD – remains in the recent aggressive upward trend, and a sizeable break above the 1.3000 area might bring 1.3178 into play. A move lower might put the 200-day moving average at 1.2714 on the radar.
EUR/GBP – is still in the bearish trend, and a break below 0.8575 could pave the way for 0.8471 to be targeted. If it manages to hold above the 0.8600 marks, it might retest 0.8786.
USD/JPY – while it holds above the 50-day moving average at 107.41, it could target 109.31. A move back below the 50-day moving average might bring 106.48 into play.
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