Risk appetite has held firm with optimism that the US-China trade deal would underpin the global growth outlook.

Risk appetite has held firm with optimism that the US-China trade deal would underpin the global growth outlook. US equities posting fresh record highs on Friday with global sentiment holding firm on Monday.

US data was mixed, but the dollar secured net gains on hopes for stronger growth with EUR/USD dipping to just below 1.1100.

Sterling dipped sharply after a weaker than expected UK retail sales report and remained firmly on the defensive on rate-cut speculation.

President Trump’s impeachment trial is due to start in the Senate this week and the most likely outcome is that there will be no significant market impact, although Trump’s rhetoric will be watched closely. Risk appetite held firm on Monday with the Chinese yuan strengthening to a 6-month high. USD/JPY held a firm tone and traded close to 8-month highs around 110.20. The Bank of Japan will meet on Tuesday with expectations of no change in monetary policy.

UK retail sales declined 0.6% for December which was well below consensus forecasts of a 0.5% increase and there was a downward revision for the November figure which cut annual growth to 0.9%. The data was notably weaker than expected and markets had been positioned for a strong release which magnified the immediate impact. Sterling dipped sharply with fresh speculation that the Bank of England would cut interest rates with futures markets pricing a 60% chance of a cut at the January meeting which undermined sentiment.

Although there was a limited recovery against the Euro, GBP/EUR held above 1.1700 and GBP/USD dipped sharply to lows near 1.3000.

CFTC data recorded a further increase in net Sterling longs to the highest level since April 2018, maintaining the threat of significant selling if UK fundamentals fail to improve. This week’s PMI business confidence data will, therefore, be very important for underlying Sterling sentiment. Chancellor Javid stated that the UK would not be aligned with the EU after Brexit, increasing concerns that domestic industry would be at a disadvantage and GBP/USD traded below 1.3000 on Monday.

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