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GBP surges on EU Divorce Deal: USD lifted by fresh stock market highs

By Nick Parsons

The pound had a quite remarkable Tuesday, falling sharply against every major currency for 18 hours then regaining all its losses and more in the space of just 20-30 minutes on headlines that “Britain and EU Agree Divorce Bill”.

Overnight, the GBP has further extended its gains, reaching a 2-month high against the US Dollar of 1.3390 and a 6-month high against the Australian Dollar of 1.7620.

The story was first broken by the Daily Telegraph, denied by the Government then corroborated by correspondents from the Financial Times.

The two sticking points in Brexit negotiations thus far have been the size of the payments the UK will make to leave the European Union and the price it will pay to do so. The UK had initially suggested €20bn whilst the EU demanded €60bn. According to news reports this morning, the final figure will be €45-55bn though it will not be confirmed in writing and will not be settled as an upfront bill.

According to one EU negotiator quoted in The Times, “All we need is four extra words.... At Florence Mrs. May said, ‘the UK will honour commitments we have made during the period of our membership’. All we need is the phrase, ‘when they fall due’, added to the end of the sentence. That’s it. No numbers, just those words.”

Financial markets were beginning to fear that failing to agree the Divorce Bill would increase the risk of a disorderly Brexit with no trade deal. The overnight news greatly eases these concerns, though the problem of the Irish border still remains unsolved.

There are no UK economic data released today so the GBP will be driven almost entirely by the broader political response to the secret divorce deal.

The US Dollar index stood at a 2-month low of 92.21 at the beginning of the week but by yesterday evening had rallied to a best level of 92.98. Overnight it has slipped to 92.84 as the pound extends its gains and the EUR turns modestly higher.

Tuesday brought fresh news on the US housing market. The 20-cities index of home prices rose 6.19% y/y (gotta love those two decimal places!) to show the fastest annual pace of growth since July 2014. All 20 cities in the index showed year-over-year gains, led by a 12.9 percent increase in Seattle and a 9 percent advance in Las Vegas, whilst 8 cities have surpassed their peaks from before the financial crisis.

With house prices up and stocks at record levels, consumer confidence comfortably beat consensus expectations, rising to 129.5; its highest level since November 2000.

Overshadowing the data was Jerome Powell ‘s confirmation hearing at the Senate Banking Committee. In prepared remarks, Powell defended the Fed’s use of broad crisis-fighting powers, and said “We must be prepared to respond decisively and with appropriate force to new and unexpected threats to our nation’s financial stability and economic prosperity.”

The stock market loved the sound of more air being blown into the bubble and promptly hit a fresh all-time high, dragging the Dollar higher in its wake.


The EUR had a very poor day Tuesday without ever being the centre of FX market attention.

By close of business in New York, it had fallen against every major currency with EUR/USD at 1.1845 and GBP/EUR at 1.1275. Overnight it has rallied 10-15 pips but remains generally out of the spotlight.

The OECD revised upwards its forecasts for the Eurozone economy but this came as a surprise to precisely no-one. It’s semi-annual World Economic Outlook noted, “Growth has continued steadily, broadening across sectors and countries, supported mostly by domestic demand. Improving labour markets and very favourable financing conditions continue to boost incomes and promote private consumption, despite lacklustre wage growth. Investment is becoming more supportive of the recovery and has expanded at a dynamic pace in the first half of the year in most countries, sustained by buoyant business sentiment, the need to upgrade the capital stock, rising profits and easy financial conditions. Exports have continued to strengthen on the back of the rebound in world trade. Business and consumer confidence indicators remain very high.”

This evening we might hear whether Bundesbank President Jens Weidmann believes this robust growth should be reflected in higher ECB interest rates whilst this morning brings the German Financial Stability Report; it is clearly the season for these!

For the past 24 hours, AUD/USD has traded in a fairly tight range either side of 0.7600 but while a closer look at the charts shows it spent more time above this level than below it, the trend does appear to be down.

Overnight it traded down to 0.7583; its lowest level in a week. A surging pound and weaker Aussie have pushed the GBP/AUD cross up to 1.7625, matching the high seen back on May 9th.

The OECD report on Australia was generally pretty upbeat: “The economy will continue growing at a robust pace. Business investment outside the housing and mining sectors will pick up, with exports boosted as new resource-sector capacity comes on stream. The strengthening labour market and household incomes will sustain private consumption, and inflation and wages will pick up gradually”.

That said, their analysis also reflecting the concerns we outlined here yesterday about the housing market: “The prolonged period of low interest rates has fuelled high house prices in large metropolitan areas. Substantial mortgage borrowing has resulted in households being highly indebted. To contain risks associated with potential large house-price corrections and financial stress, macro-prudential measures should be maintained. Australia is also vulnerable to “too big to fail” risks, due to its highly concentrated banking sector”.

Tomorrow’s Q3 capex numbers are going to have to be pretty robust if the prevailing negative sentiment around the AUD is to be reversed.

The Canadian Dollar spent most of Tuesday dragged down by falling oil prices. NYMEX Crude reached a fresh 2017 high of $58.82 last Friday, fell steadily on Monday to $58.15 and yesterday morning hit a low of $57.54. It opens this morning (the day of the 173rd OPEC meeting in Vienna) at $57.75.

USD/CAD has risen (weaker CAD) to a one-week high of 1.2822 with GBP/CAD up at 1.7145; its highest level since early June.

In its semi-annual Financial Stability Review, the Bank of Canada said, “Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation, but we need to continue to watch financial vulnerabilities closely”. Ho hum…. This could have been written by almost any central bank in the world today.

BoC is optimistic that higher interest rates and regulatory efforts to rein in risky borrowing will make the country’s financial system more resilient, though the process “could take time to unfold and the outcome remains uncertain”.

With few, if any, policy clues in the FSR and with the week’s main economic data (GDP and employment report) not out until Friday, the CAD will most likely once again be driven by oil prices.

Having soared on Monday, the NZD extended its gains even further on Tuesday before finding the air a little thin after its rapid ascent.

Its’ best levels against the currencies we follow closely here were NZD/USD0.6944, NZD/EUR0.5841, AUD/NZD1.0964, NZD/CAD0.8881 and GBP/NZD1.9118 and it opens in London down from all these points. NZD/USD is at 0.6908 having at one point overnight touched 0.6882 but the biggest reversal has of course come against the British Pound with GBP/NZD up almost 4 cents from yesterday’s low at 1.9400 this morning.

In presenting its own Financial Stability Review, the RBNZ said it will ease some of the so-called ‘macro-prudential’ regulations it had imposed on mortgage lending in an attempt to cool the residential property market without raising interest rates.

Governor Grant Spencer said in the past six months, pressures on the housing market had continued to moderate due to further tightening of LVRs, a firming of bank lending and an increase in mortgage rates. “These policies have helped improve banking system resilience by substantially reducing the share of high-LVR loans." Currently no more than 10% of loans can go to owner occupiers with a deposit of less than 20%. This cap will rise to 15%.

There’s not much of a read-across to monetary policy from these measures, though some might argue that if macroprudential policies were introduced instead of raising interest rates, easing them might open the door a tiny bit to a rate hike. This doesn’t seem a persuasive argument, however. The AUD/NZD cross is back below 1.10 mostly due to weakness in the AUD, not because of NZD rate hike concerns.