Sterling off its highs

The pound powered ahead last week on optimism regarding a  potential Brexit deal, strengthening to a high of just under 87p against the euro and to over $1.27 against the dollar, but it has since fallen back from these levels while still running well ahead of where it was trading this day a week ago. Amid all of this, the euro is not much changed against the dollar as it continues to trade in and around the $1.10 level with news of a partial trade deal agreed  between the US and China having little impact

Optimism about both a trade deal and a Brexit deal did contribute to a notable move higher in bond yields in the core markets last week, with US and German 10-year yields increasing by 20bps to 1.73% and -0.45% respectively and equivalent UK yields jumping by the best part of 30bps to just under 0.65%

Talks between the EU and the UK over the weekend were described as constructive – and will continue today – but both sides say a lot more work needs to be done. At this juncture, therefore, it is unclear if any deal will be agreed in time for the European Council meeting at the end of this week and, if a deal is agreed, will it pass through the UK parliament where the arithmetic facing the Johnson government is challenging to say the least (and its confidence and supply partner, the DUP, firing a few warning shots across its bow over the weekend)

The partial trade deal between the US and China will see the latter buy lots of agricultural products from the former and a US tariff rate increase that was to come into effect tomorrow won’t now happen (though the threat of tariff increases scheduled for December remains). The deal will not be signed for a few weeks, so there’s scope for a slip between cup and lip

Data due this week includes Euro area industrial production (today); employment (Tuesday) and inflation (Wednesday) in the UK; with retail sales and industrial output in the US on Wednesday and Thursday respectively