Tough talks: China refuses to speak to U.S., EU rejects May’s plan

British pound fell by 1.4% on Friday after EU had rejected UK’s May plan for Brexit. This result has become an additional reminder that initial positive comments of the officials are hardly a relevant indicator of the deal. The GBPUSD pair failed from 2-month highs near 1.3280 to 1.3080 area. As a result of this decline, the British currency has lost half of the growth since the beginning of the month and may remain under some pressure in the coming days on the market worries of hard Brexit, as well as through the development of technical correction of the pair after touching the overbought area last week, according to RSI index.

World stock markets begin the week with a decline in a new wave of trade war fears after China’s rejection of the nearest scheduled negotiations with the United States. It is another defeat for the optimists, who hurried up to buy assets in anticipation of a breakthrough in the negotiations between Britain and the EU, and China and the U. S. There seemed to be no further retreat, and the dialogue would now become more productive. However, politicians still believe that the stakes are not high enough, and there is still an opportunity to squeeze a compromise from the counterpart.

In addition, the markets are under pressure by the craving for profit fixation after the rally of American shares last week. MSCI Asia ex Japan declines by 0.8% this morning, Heng Seng drop by 1.1%. Futures for S&P500 has decreased by 0.2% on Monday morning after a falling of 0.5% from intraday highs on Friday.

Last week was marked by an impressive and somewhat discouraging increase in the demand for risks, despite the tightening of bilateral rhetoric between China and the United States. In contrast, the first half of this week may see an increased caution. The U.S. and China are imposing higher tariffs; many Asian markets are closed on the occasion of the autumn equinox holiday today. In addition, there is little data published at the beginning of the week that will focus market participants more on positioning before an important Fed meeting on Wednesday afternoon.

The weakening of Sterling on Friday helped the dollar index to add 0.5% and depart from 3-month lows. However, the EURUSD pair remains near 1.1750, above area 1.1700-1.1730, formerly an important resistance, which now has every chance to become an important support.

It will not be surprising if the pair continues to oscillate in the narrow range above 1.17 until it receives important signals from the Fed on Wednesday, which can become determinant for the movement of the pair in the nearest future. According to FedWatch tool from CME, the markets put 80% probability that the rate will be increased twice this year – in September and December. A clear confirmation signal from the Fed is able to moderately support the dollar. If the FOMC demonstrates alertness with the state of foreign financial markets, it is able to seriously push down the American currency.