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USD Pares Gains As EU Leaders Reach Deal On Migration.

By Alex Edwards

It did at one point yesterday seem inevitable that GBP/USD would break down through the 1.30 figure. It didn’t, as dollar strength abated and Andy Haldane, the Bank of England’s chief economist said the bank would have raised interest rates at the last meeting but for some recent poor UK economic data. He also said “the underlying picture now appears to be one of gently rising household spending……this is being supported by highly accommodative credit conditions and now-positive growth in inflation-adjusted wages.”

Risk sentiment has improved too after EU leaders reached a deal on the issue of migration and major currencies including the GBP and EUR have bounced back vs. the dollar as a result. Brexit headlines are continuing to keep a lid on cable though and it has struggled to make any form of convincing break back above 1.31.

There’s a smattering of data due out this morning including UK Current Account, Final GDP q/q and Mortgage Approvals which may decide whether the 1.31 can hold between now and the end of the week. We could be in for some volatility derived from month end/quarter end/half year end currency rebalancing too.

The dollar index is down a little on the day so far as risk sentiment shows some signs of improvement. It’s quite a change from yesterday, at which point the dollar index was flirting with a break above its 2018 high as investors ran for cover amid perceived worsening US/China trade relations.

Meanwhile, 3rd estimate Q1 GDP printed weaker than expected yesterday at 2% vs. the 2nd estimate result of 2.2%. Although the data was mostly ignored at the time, it’s probably not helped the greenback’s cause since. Investors may also be keen to take some profit on long dollar positions ahead of the end of the month and quarter, which could feed through in to today.

The data docket is looking quite busy for a Friday too with Personal Spending, Core PCE Price Index, Chicago PMI and Consumer Sentiment all due for release.

EUR/USD was on the back foot for most of yesterday’s session as the dollar remained well bid throughout. A series of German state inflation data was released on Thursday morning, and if anything, disappointed slightly.

The focus for EUR/USD traders yesterday however was the EU Summit. Leaders agreed on an immigration deal whereby EU countries would set up migrant centres on a voluntary basis and restrict movement of asylum seekers between EU states. This helped to support the improvement in risk appetite and ultimately weighed on the dollar. EUR/USD rose back through 1.16 and on to a high of 1.1666. It’s settled back to open this morning at 1.1630.

German coalition talks begin this weekend which could give us some clues as to Chancellor Merkel’s chances of staying on. In the meantime European Flash CPI is due to be released this morning.

AUD/USD gapped higher overnight, along with the likes of EUR/USD and GBP/USD, following the announcement of the migration agreement by EU leaders. It hasn’t quite made it up and through the .74 level but isn’t too far off in London this morning.

In other news overnight it seems the Australian opposition party is backing down on a pledge to scrap medium-sized company tax cuts, which is also adding a layer of support to the aussie dollar. Private sector credit data was released overnight too but didn’t have too much of an impact on the local unit.

The CAD is much stronger vs. the USD this morning with USD/CAD having fallen from 1.3350 to 1.3220 over the last 24 hours. With investors having taken some time to fully digest Governor Poloz’ comments yesterday – which were initially interpreted as dovish – and with further gains in the oil price the loonie went on a bit of a tear vs. the greenback, and other currencies.

Investors will now turn their attention to Canadian GDP and the Bank of Canada’s Business Outlook Survey. It could be a busy and volatile day for the loonie.

NZD/USD has recovered off of its 2018 low, helped by the turn around in risk sentiment post the EU Summit deal and the rally in most other major currencies vs. the dollar. The commodity currency still looks a little vulnerable though, especially so following the RBNZ’s comments earlier in the week, and the increasing divergence this means for NZ and US interest rates/monetary policy.