Han Tan, Market Analyst at FXTM, comments on market sentiment and developments in the month ahead.
Stocks are on course for a positive end to what has been a volatile month, after major US stock indices gained over 1.2 percent each overnight on signs that US-China trade tensions will not escalate further in the near term.
The US-China trade conflict is still expected to have a major influence over market sentiment in September. Despite US tariffs on $300 billion worth of Chinese goods set to be raised beginning September 1, another round of trade talks could take place in the month ahead. Such a possibility allows markets to continue clinging on to hope that a resolution to this protracted impasse is not dead in the water, with traders using this as an excuse to push further into risk-on territory at any given opportunity.
Sterling in September: Brexit-driven volatility
September will also see the suspension of the UK parliament, while Brexit talks press ahead with UK and EU officials set to meet twice weekly. Even with the prospects of more engagement between the UK and EU over Brexit, the Pound has returned into sub-1.22 territory against the US Dollar.
Pound traders are well aware of the politically-treacherous path that lies ahead in the quest to find a Brexit deal ahead of the October 31 deadline. Still, Sterling’s outlook remains dismal at this point in time which is keeping GBPUSD on a slippery slope, with a likelier path towards 1.20.
More by FXTM: Unloved rally in US equities
Dollar Index on quest to erase all of August losses
The Dollar Index (DXY) is currently trading around the 98.5 level, as it attempts to erase all of its losses this month. The second reading of the Q2 US GDP of two percent was in line with market expectations, which allowed DXY to push higher.
Although investors are well aware of the slowdown in the US economy, the latest data underscored the strength of consumer spending (which accounts for over 60% of US GDP), and shows that the primary growth driver of the world’s largest economy is still resilient.
Still, the headline figure suggests that the protracted US-China trade tensions are weighing on other components of the US economy, such as exports and investments. Faced with slowing growth prospects in the second half of 2019, the Federal Reserve’s decision to lower US interest rates appears justified, with markets pricing in two more Fed rate cuts in 2019. Moving forward, shifting market expectations surrounding the Fed’s policy path are set to sway DXY, as the Fed’s data dependence continues to be tested in the interim.
The contrast between the US and EU economic trajectories are being factored into EURUSD, with the currency pair increasingly biased towards the downside. The bloc’s currency is also contending with the fallout from protracted US-China trade tensions, along with Brexit uncertainties and Italy’s political turmoil, which make for an overall dismal outlook on EURUSD.