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USD weakens amid improving risk sentiment.

By Alex Edwards

GBP/USD is higher again this morning, mostly a result of a weakening greenback. Risk sentiment remains positive as evidenced by the performance of equity markets overnight in Asia, prompting this mild move out of the USD. However, there are a few worries about this weekend’s G7 meeting and whether that might result in further heated debate, perhaps even proposed action, on tariffs and Iran.

It was a mixed session for cable yesterday. The pair came under selling pressure after US data printed stronger than expected. The Brexit headlines didn’t help sterling’s cause either and it’s a surprise the most recent headlines aren’t having a more negative impact on the pound this morning; Brexit Secretary David Davis is opposed to Theresa May’s plan for a temporary customs arrangement. He is concerned that without an end date the arrangement could continue indefinitely. The PM will be meeting with senior minister today to try and resolve the ongoing tensions, so watch this space.

There isn’t any major economic data on the way from the UK today. MPC member Ramsden is due to speak later on in the day, but Brexit headlines, the war of words on tariffs and more geopolitics will likely dominate.

The USD is weakening currently as investor risk sentiment turns increasingly positive. US equities and bond yields followed global risk sentiment higher yesterday as the US dollar index retreated another 0.2% on the day. The S&P500 soared to fresh 3-month highs too with the US 2 and 10 Year treasury yields also ticking higher to 2.52% and 2.98% respectively.

This move has come despite the release of better than expected US data yesterday, namely the US Trade Balance for April which printed at -46.2B vs. forecasts for -56.2B, a seven-month low.

The closer we get to the G7 this weekend, the more the chance we see a change in risk sentiment. Its’ also a big week next week for US data so we may well see some market jitters creep in soon. It’s not such a big day for US data with only US Consumer Credit on the docket. So with little by way of data direction there’s a chance we may see some profit taking on these short USD positions between now and the end of the week.

EUR/USD is flying this morning having just broken through the 1.18 big figure. The dollar is weaker, yes, but there’s also a growing sense amongst market participants that the ECB will signal they are closer to ending their QE program at next week’s “live” meeting. The ECB’s Peter Praet in particular, sounded a lot more hawkish in a speech in which he said that the convergence of inflation towards their aim has been improving.

German Factory Orders has just been released this morning and printed a lot weaker than expected, but it’s been completely ignored by traders who seem more intent on selling the dollar against the risk backdrop. Italian Retail Sales and European Revised GDP are released later on this morning.

AUD/USD run out of steam overnight, this following a generally strong performance through the early part of this week. It failed to make a sustained break above .7670 and following the release of a weaker set of Australian April trade data, the pair fell back towards .7650. Other than that, it has been a muted session for AUD/USD.

The CAD struggled to capitalize on the broad dollar weakness/risk-on move yesterday. The loonie still ended the session on positive territory though, up around 0.15% versus the greenback, although at some point during the session it reached a new month low of 1.2859.

The market initially supported the Canadian dollar as headlines appeared that the US was willing to negotiate individual NAFTA trade agreements, but then a report that White House officials are discussing additional penalties on Canada coupled with a correction in oil prices generated a reversal in USD/CAD, which jumped from 1.2860 all the way up to 1.2945, where it has now settled.

The Bank of Canada are due to release their Financial System Review today. Governor Poloz will also be speaking about the review. Furthermore, CAD traders will be looking to Canadian employment data, due tomorrow.

NZD/USD has moved slowly higher over the last 12-24 hours. The pair has pushed through .7050, only just, and opens this morning in London at .7052. Improving risk sentiment is providing good support to the bird currently, but risk sentiment is fickle, especially so in the run up to a G7 meeting, and especially so when there are ongoing and rising trade tensions so soon before a meeting.