Geopolitics Join Trade Talks

10/09/2019 12:16 pm EST

Focus: FOREX

Adam Button

Co-Owner and Managing Director,

Geopolitical risks may be diverting the market’s attention away from Fed policy and potential progress on U.S.-China trade talks, reports Adam Button.

Tuesday's speech from Fed Chair Jay Powell is currently being displaced by Turkey's military operations in Northern Syria and the lead up to Thursday's resumption of US-China Trade Talks as what is driving markets. This means more swings in indices and no clear trends in FX. 

U.S. crude oil remains well below resistance at $54 ahead of the inventory report. It's worth mentioning Powell's speech ahead of this evening's minutes release of the September FOMC meeting. The Fed put may finally be reversing on markets as Powell showed some reluctance to cut rates if geopolitical conditions stabilize. The Japanese yen (JPY) and Swiss franc (CHF) are the weakest currencies of the day as indices find a floor for now. The British pound (GBP) remains weak as the message from the EU-UK noise is increasingly pointing to no-deal one week ahead of the UK-EU Summit.

Fed chair Powell mentioned 'data dependence' seven times in his speech on Tuesday in a strong hint that policymakers aren't as certain about cutting rates as the 77% chance priced into October and 45% chance of two cuts before year end.

One major factor that Powell highlighted was geopolitical risk. He's undoubtedly referring to US -China trade. Should there be some kind of positive conclusion, or even a face-saving punt down the road, it may not be the positive risk event that markets are hoping for because the Fed may pause.

On the flipside, if talks break down— or if, as many suspect, rumors of progress have been overblown — risk trades will certainly be hit hard.

That leaves a negative skew ahead of an event that's largely binary, with commodity currencies particularly vulnerable. The market sensed that on Tuesday and it reacted to more signs of unease between both sides, including a Chinese report saying that Beijing could leave early.

The S&P 500 fell 43 points and commodity currencies softened.

Powell also touched on balance sheet expansion and unambiguously highlighted that it's not a new QE program. That may be debatable but the important point is that the Fed doesn't consider it to be easing or a reaction to anything in the economy. We may hear more about what's coming in the FOMC minutes due this afternoon.

Adam Button is co-owner and managing director of and a contributor at You can see Ashraf’s daily analysis at and sign up for the Premium Insights. Ashraf's Tweet on indices here.

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