Wild fluctuations in stock indices during the least liquid time of the day (post-US, pre Asia) gave way to a gradual rebound into the U.S. session. Sudden declines in equity markets on reports that China's delegation could leave the United States early were reversed higher later after President Trump tweeted, he would meet China's vice Premier. U.S. Consumer Price Index (CPI) came in lower than expected. The British pound (GBP) spiked more than full cent to 1.2315 on an optimistic joint statement from UK and Irish Prime Ministers Johnson and Vradkar. 

Trade Talks' Low Bar of Expectations

Headlines will continue to dominate in the hours and days ahead but judging by the positive reactions to some of these headlines, expectations have been lowered to the point where any kind of a ceasefire would be a moderate win— although a fleeting one.

The trade meetings this week are dominating markets but a secular theme in global economies is low inflation. It was something the Federal Reserve highlighted in the FOMC minutes and will be a focus in the days ahead. On Wednesday, the euro was the top performer while the yen lagged.

Fed's Low Inflation Trap

The Fed’s argument for lowering interest rates has slowly shifted from one primarily about trade risks and uncertainty to broader concern about low inflation. It's all a bit rich considering the Fed has missed its inflation target for years and was hiking rates but it's pertinent, nonetheless.

That's especially true because there are signs of a turn in the economy. Wednesday's JOLTS report showed the third consecutive decline in job openings, something that hasn't happened since 2009. The level of opening remains high and the overall jobs market is very strong, but there are few signs that it will strengthen further and that means any wage pressures could soon dissipate.
With just nine days until the blackout period begins, officials will need to make a concerted effort to tame cut expectations, which are at 78%.

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