Brexit, trade and FOMC to dominate agenda next week

Another week has flown by and what a week it has been! The biggest story this week was perhaps the easing of trade wars as China apparently blinked first in its dispute with the US. Global stock markets, led by China, and base metal prices all staged a relief rally. The firmer metal prices and positive risk sentiment helped to boost the likes of the Australian dollar and yen crosses. Although China retaliated to the latest imposition of tariffs by the US, Beijing nevertheless sharply slashed its tariff rates on imports of US goods compared to what it had proposed previously. So, China in particular appears willing to talk and this has boosted speculation among market participants that an agreement will be formed at a not-so-distant future despite the growing trade dispute. Thanks to renewed optimism over trade, the Dow posted its 12th record close of the year on Thursday although there was little further follow-through on Friday when this report was being written.

In Europe, Brexit remained in focus and the incoming mixed headlines tossed the pound around throughout the week. But after the early optimism, all hopes for a quick resolution were dashed after EU negotiators told UK Prime Minister Theresa May that her Chequers Brexit plan “would not work.” The pound fell back sharply on Friday morning, giving back its entire gains made the day before. Then it sunk even more after UK Prime Minister Theresa May admitted that the UK and EU "are at an impasse" in Brexit talks and wanted to be shown respect – demanding the EU to shift its negotiating position to avoid a no deal exit.

Looking ahead to next week, we have two major central bank meetings on the agenda, namely the US Federal Reserve and Reserve Bank of New Zealand both on Wednesday, while in terms of data the economic calendar will be light. It will be also be interesting to see how the EU would respond to Theresa May’s speech.  At the moment the UK-EU relationship looks divided, but the same can be said about May’s position within her Conservative party. So, things could potentially get a lot worse for her and the UK before it gets better. This concern could weigh further on the pound in early next week.

Meanwhile as far as the Federal Reserve is concerned, a rate increase is almost certain on Wednesday. It would be a massive shock if the Fed refused to hike. In any case, the dollar may not respond much as a rate hike is now fully priced in. The Fed’s next “live” meeting is on December 19-20, which is when the Fed is most likely to hike again, should economic conditions still warrant it. But this potential rate hike is less certain. Thus, if there are more indications from the rate statement, dot plots or Jerome Powell at the press conference suggesting the FOMC is leaning towards a rate hike in December than had been indicated in the past, then this could be dollar-positive.