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Another potentially big day for the pound as leadership challenge continues to loom.

By Alex Edwards

Reports circulated yesterday morning that there were growing numbers of MPs ready to submit letters of no confidence in Theresa May, but despite this, GBP/USD held steady. It was only as she addressed the CBI conference later in the day that GBP/USD shed a quick 70-80 points, albeit she didn’t say anything we hadn’t already heard before.

There turned out to be good support at and just under the big 1.28 figure and it wasn’t long before Cable recovered, helped in part by a softening greenback. The pair has held firm and traded a steady range overnight, despite news that DUP MPs abstained on a series of votes on the Finance Bill yesterday evening, in protest of the current agreement. On one occasion they voted with Labour to cut the government's majority to just five. The DUP have warned Theresa May to "keep her side of the bargain" saying the backstop would result in new regulatory barriers between Northern Ireland and the UK.

It’s another potentially big day for the pound with BoE Governor Carney speaking, along with other MPC members, following the release of the central bank’s inflation report. The threat of a leadership challenge is still looming, too, and herein lies bigger potential for a negative GBP shock.

The dollar weakened through trade on Monday, feeling the effects of some familiar pressure points including the US-China trade war. Ahead of the all-important G20 meeting in Buenos Aries later this month, US VP Mike Pence and President Xi weren’t afraid to ratchet up the rhetoric during the APEC summit, undermining market hopes of a reconciliation. Markets reeled at the news with key US equity indices’ falling around 1.5% led by some notable tech stocks. Adding to the sell-off was the NAHB housing market index which had its worst drop in four years, further unsettling the market.

New York Fed President John Williams spoke yesterday too, and stressed that monetary policy wasn’t on a pre-set course. He said “we’ll be likely raising interest rates somewhat but it’s really in the context of a very strong economy”, further undermining market expectations for a December rate hike.

There’s no U.S. data due today.

The euro hit a fresh two-week high yesterday as selling pressure continued on the greenback. A weaker than expected US NAHB housing market index print fueled a sell-off in U.S. stocks, weighing on the dollar, too. Meanwhile, the situation in Italy simmers away and continues to pose a risk to the single currency, this despite recent comments from the ECB’s Nowotny who said this morning at contagion from Italy’s budget plans has been very limited.

AUD/USD has fallen from its two and a half month highs yesterday as it seems the US and China trade conflict seems a long way off being resolved. AUD/USD broke below psychological support at 0.7300 and touched a low of 0.7277 during the North America session. The scandalous Nissan headlines didn’t help Asian stocks and added to the negative risk sentiment, weighing on the AUD, while the IMF said overnight that the balance of risks to Australia’s economy are “tilted to the downside”.

In other news the RBA released its monetary policy minutes overnight, but failed to surprise or have any impact on the local unit, despite being ever so slightly more hawkish than many market participants were expecting.

The Canadian dollar edged lower against its U.S. counterpart on Monday, straying close to its four-month low, as oil prices slipped and global risk appetite remained in check. The USD/CAD pair reached an overnight low of 1.3141 (down 0.38 per cent).

On the local data front there are no scheduled releases today. The focus will turn to domestic data releases at the end of the week.

From a technical perspective, we continue to expect support to hold on moves approaching 1.3100 while any upward push will likely meet resistance around 1.3200.

Monday saw the Kiwi rise to 0.6873 in early trading, before retreating as markets digested US vice president Mike Pence’s comments directed at Chinese President Xi at the Asia-Pacific economic cooperation summit. The comments dampened risk sentiment and weighted on both the NZD and the AUD. The downward slide came despite stronger than expected second tier data releases; NZ PMI and PSI reads both bounced with the PMI rising to 53.5 in October from 51.9 in September and the PSI rising to 55.4 from 53.9.