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Another make or break day for the pound as PM May faces more Brexit questions

By Alex Edwards

The pound lost over 1% against the greenback yesterday falling from levels of 1.3269 and down under 1.31 on the back of big Brexit concerns. At one stage it was looking like PM May could face being ousted if she failed to win a key trade bill amendment, this being the main driver of GBP’s weakness through the day. Pro-EU MPs wanted the UK to join a customs union if it fails to agree a free-trade deal with the EUR. The PM, who argues that such a deal would prevent the UK from striking new trade deals with other countries, won the vote by a six vote margin. However, the damage to the pound had seemingly been done and GBP/USD has continued to hug the 1.31 level over the last few hours. BoE Governor Carney’s comments yesterday morning probably didn’t help the situation. He said that “it would be a material event for interest rates if Britain leaves the European Union next year without a deal to smooth its departure. Our job is to make sure we are as prepared as possible.”

It could be make or break for the pound today with inflation due for release at 9:30. Theresa May is also due to face questions from Tory MPs over Brexit at the Liaison Committee of select committee chairs. PM’s Questions are also due to take place at noon, so we could well see volatility in the pound throughout the day today.

The US dollar advanced across the board on Tuesday recouping losses suffered through last week’s close and Monday’s open. Recent trade tensions have heightened concerns that the Fed may be forced to temper the pace of monetary policy tightening, but comments from newly appointed Fed President Jerome Powell yesterday helped to moderate the growing disquiet.

Powell’s senate address hit on a continued expectation for US Growth and a stronger economy while downplaying the expected effect of recent trade hostilities on Fed plans for monetary policy. Largely dismissing suggestions the trade war will dent domestic growth Powell has left the door open for a possible two additional rate hikes this year, driving the dollar to highs just below its 12 month peak. However, the ongoing trade dispute will likely continue to weigh on investors’ minds and likely at least in to late August when the newly announced 10% tariffs on 200bn on Chinese exports are introduced.

Attentions today turn to Powell’s House of Representative address while crude oil inventories and building starts dominate the macroeconomic docket.

The euro closed the session 0.40% down versus the USD yesterday, just above the support level of 1.1660. It’s continued to decline overnight, breaking through this support level, and opens in London at 1.1645.

It’s come mostly as a result of a strengthening dollar. As mentioned above, Jerome Powell delivered an upbeat assessment of the US economy yesterday, signaling that gradual rate rises are the best way “for now” given the “encouraging” inflation numbers. The US dollar rallied following a spike in US 2YR yields and EUR/USD dropped to a new weekly low.

US Dollar strength was again the main narrative that drove the Aussie dollar’s fortunes overnight and yesterday. Back below 0.74, the Australian dollar changes hands this morning at 0.7350.

Again, the catalyst for the swift reversal of direction was Federal Reserve Chair Powell who was decidedly hawkish in his semi-annual testimony to the Senate. Of note was Chair Powell’s stated intention to continue with the gradual rate rise path “for now”. Against the backdrop of geopolitical tensions and trade disputes the market appreciated the positive take on the health of the US economy and immediately responded. The greenback surged against its counterparts which saw the aussie forced lower.

Broad USD strength following the upbeat economic message from Fed Chairman Jerome Powell to the Senate weighted on the loonie yesterday, this despite a very strong Canadian manufacturing sales number of +1.4% (versus +0.4 % expected). USDCAD broke temporarily above the 1.32 resistance level, reaching a new weekly high – it opens in London at 1.3239.

There was little reaction to the latest release of NZ Inflation figures for the quarter which came in at 0.4% and just below forecast while the annualised inflation reading dipped to 1.5%. The kiwi saw little movement despite a quick dip lower on the initial release to 0.6760.

The afternoon was eventful after seeing the Kiwi bolt through the 0.68 handle to an intraday high of 0.6840 following the release in the afternoon of the RBNZ sectoral factor model – a measure of inflation showing an actual rise of inflation for the June quarter of 1.7% and the fastest pace since 2011.

Broad US Dollar strength and another weak GlobalDairyTrade auction pulled the New Zealand Dollar lower as global dairy prices dropped for the fourth time in a row in auctions early this morning with the index showing a negative reading of 1.7%.