The UK economy has been hit by Brexit and the weakening global economy, which comes as a result of the trade war, as well as from the monetary tightening that major central banks have been doing in recent years, particularly the FED. Manufacturing, construction, industrial production, etc, have fallen in recession. Although, certain aspects of the economy have been holding up well, such as inflation, earnings and employment. But, in the recent weeks these aspects have started to weaken as well. Inflation softened in September as last week’s report showed, while today, the unemployment rate ticked higher and earnings cooled off.

Although, the GBP didn’t mind much as it continues to climb on positive sentiment surrounding Brexit. The Brexit deal is not done yet, but the hopes remain elevated which have kept GBP/USD bullish in the last several days. The US-China deal is not done yet, but they’re pretty close to closing the Phase One deal. Although, China said today that they might not be able to buy $50 billion of US agricultural products annually, unless the US removes all tariffs. Trump won’t like that, but it’s not like it is an official demand. So, the Phase One deal will be signed off soon, I assume.

The European Session

• The EU Wants a Brexit Deal but Not at Any Price – France’s European affairs minister Amélie de Montchalin made some comments this morning, saying that we seek a Brexit deal but not at any price. Three issues remain for France, the Irish border, internal market and future ties with the UK. All of those must be fair. Hopes that a Brexit deal is possible but it must be a balanced deal.
• FED’s Bullard Not Implying Further Rate Cuts Soon – St Louis FED president James Bullard is the most dovish FED member. He was speaking in London a while ago and made some dovish comments, as you’d expect from him. He sees risk of inflation staying too low and risk of sharper-than-expected economic slowdown. Decisions on future cuts will be meeting-by-meeting. Trade policy uncertainty factors into calculation. Recent yield curve inversion was a warning sign. Could reverse rate cuts (into rate hikes) in 2020, 2021 if economy improves again (Damn, Bullard implying rate hikes). Although zero rates, forward guidance, QE are still in the playbook for “ordinary recession”.
• UK Employment Report – The employment report from the UK was released this morning. The unemployment rate has ticked higher to 3.9% again, against remaining unchanged at 3.8% expected. Employment change came at -56k against 26k expected, down from 31k previously. September unemployment claims change came in at 21.1k. The previous number stood at 28.2k, but was revised to 16.3k.
• UK Earnings Report – UK August average weekly earnings also softened, losing two points, declining to 3.8% against 4.0% 3m/y expected. The previous number was revised a tick lower to 3.9% from 4.0%. Average weekly earnings excluding bonuses on the other hand, ticked higher to 3.8% from 3.7% 3m/y expected. The previous reading was revised to 3.9% from 3.8%.
• China Support the Partial Deal but Has Requests – Comments by the Chinese foreign ministry today, suggesting that the statement released from the US on partial trade deal is accurate. There is no difference with US on trade agreement. But, Bloomberg reported that China wants the US to remove all tariffs, since they will struggle buying $50 worth of US agricultural products. Although, it’s not an official request as of now.

The US Session

• German Governments Revises GDP Growth Projections Lower – Reuters reports on this issue a while ago. According to their sources, the German government still sees 2019 GDP growth at 0.5%, which is much lower from the initial estimates when the year started and it is lowering their 2020 forecast to 1.0% from 1.5% previously.
• BOE’s Vlieghe Hinting at Monetary Stimulus – BOE’s Vlieghe said a while ago that monetary stimulus will be needed if Brexit uncertainty becomes entrenched. Economic slack in the UK is increasing again, the global outlook has deteriorated since July. He sees risk of monetary policy running out of ammunition.
• Canadian Existing home Sales – The Canadian housing market has picked up in most of the country in the past few months but Vancouver continues to struggle. In August we saw a 1.4% increase in existing home sales and today the number for September was estimated at 2.0%. But it missed expectations, increasing by only 0.6% which is not a good sign.

Trades in Sight

Bullish USD/JPY

• The trend is bullish
• The pullback lower is complete on the H1 chart
• The 20 SMA has turned into support on the H4 chart
• The previous candlestick points up

The 20 SMA is doing a good job as support today

USD/JPY turned bullish last week as the sentiment improved in financial markets on positive comments regarding Brexit and the US-China trade negotiations. We saw the price retrace lower yesterday and again today after comments from China that it wants more time to negotiate, but sellers couldn’t push too low, so the pressure remains on the upside. We are long on this pair by the way. Today, the 20 SMA (grey) turned into support for this pair and the price bounced higher off that moving average. The previous H4 candlestick closed as a pin above the 20 SMA, which is a bullish signal and the current candlestick is starting to look bullish as USD/JPY climbs higher.

In Conclusion

The sentiment remains positive in financial markets today, as safe havens have turned bearish again. But, Commodity Dollars are still sliding, which means that we’re going through a phase of USD strength right now. Let’s see how long this can continue.