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GBP/USD inches higher ahead of big week for the pound

By Alex Edwards

The pound was well supported at the start of last week, reaching a high of 1.3365 vs. the dollar. However, it dropped and found support at the round number of 1.3100 as it looked like there were some tensions growing between UK Prime Minister May and US President Trump. Trump had disapproved of May's Brexit policy and said it would threaten a trade deal between the US and the UK, weighing on GBP. He later went on to publicly apologise for his reported attack on UK PM May’s Brexit strategy and apparent support for Boris Johnson, saying a free trade deal was “absolutely possible”, and praising Theresa May as a “tough negotiator”.

On Sunday, during a live interview with the BBC, PM May revealed Trump’s big advice regarding Brexit. He told her that she should sue the EU over Brexit terms, and should not "go into negotiations", effectively pushing for an extreme, hard Brexit scenario. This Monday, the House of Commons will review the government's trade bill, and May hopes there won't be amendments to it. A clean vote that supports her strategy will likely help the pound well supported.

Looking ahead to economic data this week, we are due average earnings and employment data on Tuesday, followed by CPI on Wednesday and Retail Sales on Thursday, so a busy week ahead for the pound.

The US dollar edged lower into the weekly close, fading against other majors as stocks and equities rallied, prompting short run profit taking on improved risk appetite. Falling against the Yen and Euro losses were compounded following softer than anticipated consumer sentiment data. Data showed that consumer confidence fell to a six-month low in July while inflation expectations also moderated lower, dampening demand for the world’s base currency.

Having touched two-week highs earlier in the session at 95.241 the dollar index corrected as risk appetite crept back, however losses were tempered somewhat as the cloud of broader trade tensions hung in the air. China recorded its biggest trade surplus with the US in June, a statistic that is likely to only further inflame trade hostilities and push President Trump to extend the tariff war in a bid to force China to the negotiating table. With the Fed still on track to raise rate at least once more this year it is hard to move away from the dollar at present.

Attentions now turn to retail sales data Monday for short term macroeconomic direction while trade dominates wider direction and remains front and centre in influencing broader demand.

The euro closed the week on a relatively positive note, improving around 0.10% to 1.1685, after being down more than 0.50% versus the greenback earlier in the day on Friday. The dollar gave up its gains on Friday in line with lower US yields and following lower than expected import prices data and a weaker University of Michigan Sentiment report.

The EURUSD continues to trade within the 1.16 to 1.17 range, with both levels apparently acting as strong short-term support and resistance respectively.

The Australian dollar remains relatively unchanged to start the week, opening this morning at 0.7420. The Aussie closed out its fourth consecutive week hovering around the 0.74 mark, unable to progress amid the broader narrative of trade tensions that are dominating the headlines.

The Aussie oscillated for most of Friday, ranging from between 0.7364 and 0.7482 as trade concerns weighed on the local unit. Again, the impetus for direction was found in the headlines with President Trump ramping up tariffs on China to a proposed $200b worth of goods. China didn’t immediately retaliate, as widely expected, which provided some much-needed relief for the AUD. The relief coalesced into a small rise for commodity currencies, including the Aussie, as risk appetite returned to the market. Nevertheless, markets trade within a tight range as trade war headlines dominate attentions.

In terms of data this week, Monetary Policy Meeting Minutes are released later tonight and employment numbers are released on Thursday.

The loonie was little changed on Friday, closing flat versus the USD at 1.3160. The CAD was able to recover from the 1.32 highs as the greenback lost steam following weaker than expected US economic data.

The CAD was supported by a spike in oil prices of more than 2%, although WTI prices corrected towards the end of the session after rumours about Trump considering tapping crude reserves to damp gasoline prices circulated.

From a technical perspective, we continue to trade within the recent 1.31/1.32 range and it seems we’ll need further news or data releases to move away from this. June inflation and May retail sales will be released this week from Canada.

The New Zealand dollar closed last week slightly weaker when valued against the US Dollar. The kiwi dollar traded at 0.6775 at the close on Friday, down from 0.68 cents a week ago and it continues to struggle on the back of poor domestic data and headlines about a worsening trade war between the US and China.

On Friday we saw the release of Business NZ Manufacturing Index (PMI) for the month of June which dropped 1.6 points to 52.8 (a PMI reading above 50.0 indicates that manufacturing is generally expanding). Looking ahead this week and the macroeconomic calendar is fairly light with the only major release Tuesday’s second quarter Consumer Price Index (CPI). With a quarterly rate of 0.5 per cent forecast, annual increase of 1.6 per cent, should result in keeping the Reserve bank of New Zealand cautious and monetary policy in a neutral stance.