Monday AM: GBP in Mini Bounce | EUR Eyes Draghi Testimony | USD Bid on Soft Global Sentiment

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Global markets are soft at the start of the new week with Asian shares wobbling amidst fears the U.S.-China trade war won't conclude anytime soon.

China over the weekend officially cancelled the potential trade talks between the two countries this week following last week's announcement of new tariffs against China.

Talks will now not be likely until after the US mid-term elections in early November.

This environment has seen the Yen and U.S. Dollar outperform rivals as demand for safe-havens increases.

In line with these dynamics, the Australian Dollar is a laggard at the start of the week.

GBP

Sterling is marginally higher against the major currencies at the time of writing suggesting there is something of a corrective rally underway.

However, the gains are timid and we would by no means describe the moves as representing a reversal.

The Pound has been bruised by the sharp and deep nature of the sell-off suffered through the course of Friday, September 21 where U.K. Prime Minister Theresa May said that without concerted engagement by European Union counterparts Brexit negotiations risk failure.

We expect the Pound to continue reflecting swings in Brexit sentiment with gains seen on growing expectations for a deal, and losses to reflect deteriorating sentiment for such an outcome.

The U.K. economic calendar is largely empty this week so Brexit and technical developments are likely to be in the driving seat.

EUR

At 09:00 B.S.T. German IFO is released for September, with consensus looking for the headline business climate index to edge lower to 103.2.

Watch European Central Bank president Mario Draghi who is scheduled to appear before the ECON Heading of the European Parliament at 14:00 B.S.T.

We expect Draghi to be grilled on current monetary policy settings as well as  what the outlook holds.

With a light economic calendar in the Eurozone, and globally, what Draghi says could exert some influence on the travel of the Euro.

Last week, both the ECB Chief Economist Praet and ECB board member Coeuré gave speeches that analysts believe are less dovish in their rhetoric than we have been used to.

Over the weekend, ECB’s Nowotny said that monetary policy should be tightened sooner than originally planned.

He also argued that the current ECB crisis mode is not needed anymore as Europe is currently in a very good economic situation.

"We strongly doubt that Nowotny – as he also admits himself – reflects the majority at the ECB governing council," says Piet P.H. Christiansen, a Senior Analyst with Danske Bank.

USD

As mentioned, the Dollar is outperforming somewhat thanks to the more sombre tone to global markets.

We await any potential developments on the trade war issue but note nothing to be imminent on the calendar.

For markets, it will be a case of treading water ahead of this week's U.S. Federal Reserve decision where another 0.25% raise to interest rates are widely expected.

However, it is what the Fed delivers in terms of guidance that matters. Of note, changes to the 'dot plot' will be watched - this is a graph showing where the members of the Fed's FOMC see interest rates being in the future.

If the dots rise, thereby indicating the potential for higher rates than expected in the future, the Dollar could rally.

"Fed Chair Powell’s press conference will be closely watched but we expect his comments to reflect growing upside risks to the economic backdrop. Our economists expect him to be dismissive of the notion tariffs are a significant downside risk. The Fed will also reveal its 2021 dot plot for the first time. While there is unlikely to be any change to the 2018 and 2019 medians," says Sue Trinh with RBC Capital Markets.

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