FX market outlook

All eyes on the Trump-Xi meeting

• The Trump-Xi meeting is due tomorrow; whether a “ceasefire” is agreed may determine the near-term direction of the dollar and equities
• Market reaction to FOMC minutes was muted. Attention turns to a speech by NY Fed President Williams today at 1400 GMT
• Oil rebounds after posting fresh one-year lows, eyes OPEC meeting

Trump and Xi to meet, outcome may shape risk appetite

Movements in the FX market were largely subdued, with investors increasingly turning their attention to the Trump-Xi Jinping meeting tomorrow. The focus will be on whether a “ceasefire” on further tariffs will be agreed, which may set the stage for a gradual de-escalation in tensions and even a “grand deal” further down the road. While signals by various US officials initially pointed to a decent likelihood for a truce, the rhetoric has toughened somewhat in recent days. The question is whether this is part of “the plan”, in the sense of the US posturing ahead of the talks to gain negotiating leverage, or whether the American delegation will truly seek major and perhaps unrealistic concessions.

The outcome will probably be crucial for risk appetite over the short term. A potential “truce” could lift sentiment, propelling riskier assets such as stocks, the aussie, and the kiwi higher. As for the dollar, considering that it has acted as a safe-haven in the midst of this dispute, gaining whenever tensions escalated, it will probably edge lower if markets get the sense a ceasefire is looming as defensive bets are unwound. A failure to reach a consensus, or even worse, renewed threats for further tariffs, would probably trigger the opposite reactions; namely a stronger dollar and lower equities.

Dollar unimpressed by Fed minutes, looks to Williams’ remarks

The dollar index remains on a soft footing amid elevated concerns the Fed may pause its hiking cycle next year. The minutes of the latest FOMC meeting yesterday did not reveal anything particularly new. “Almost all” members judged another hike is warranted “fairly soon”, solidifying expectations for a December action. Adding credence to the theme a pause may be looming though, “many” participants considered it appropriate to gradually shift to language that places greater emphasis on incoming data.

Looking at market pricing, only a single quarter-point rate hike is factored in for 2019, versus the three the Fed itself indicated in its latest “dot plot”. Considering the strength of the US economy though, even accounting for signs it may be slowing, this pricing seems overly pessimistic – especially since there hasn’t been any clear signal so far pointing to a pause. This doesn’t go to say there won’t be one, but rather that it’s probably too early to tell at this point, and that is why the Fed is trying to keep its options open as well. Remarks by New York Fed President Williams today at 1400 GMT may shed some more light on the matter.

Oil rebounds after touching new lows, eyes next week’s OPEC summit

Crude prices briefly fell to fresh one-year lows yesterday, before rebounding after a report that Russia is becoming “increasingly convinced” it needs to cut its output alongside OPEC. Indeed, markets are looking towards next week’s OPEC meeting (Dec. 6) as a potential source of support for oil prices, hoping the cartel will make a credible commitment to curb its output and stabilize prices. Heading into the meeting, it wouldn’t be a surprise to see crude prices stabilize or even recover as speculation for a cut grows, particularly if the various officials continue to strike an optimistic tone.

Other highlights for today

In the Eurozone, preliminary inflation data for November are expected to show headline inflation cooled somewhat in yearly terms, though the core rate that excludes volatile energy and food items is forecast to tick higher. The ECB tends to focus more on the core figure, where a potential acceleration may help the euro to recover a little.

In Canada, GDP for Q3 is due out.

Besides the Fed’s Williams, ECB members Mersch (1015 GMT) and Coeure (1215 GMT) will speak. ECB President Draghi may also deliver remarks, though there’s no fixed time for his appearance.