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Can the pound survive the week on Brexit news alone?

By Hamish Muress

Following on from the long weekend the theme for sterling is much like last week’s; no data so instead the pound will be driven by reports and stories around Brexit. One reprieve for many sterling buyers who are worried that Brexit will weigh on the currency’s performance is the report that the Brexit deadline, originally penciled in for the 18th-19th October could be extended by four weeks. The dialogue between Barnier and new Brexit Secretary Dominic Raab has been positive and whilst the extension is good news, the original deadline was in place to allow the EU Summit time to vote on the Brexit deal. If an extension is added then an emergency summit will have to be penciled in for November. Between now and then expect further drama as Parliament returns from its summer recess before the party conferences kick off in September.

Comments at the back end of last week from Federal Reserve Chairman Jerome Powell at Jackson Powell has thrown investors hopes around a fourth rate hike this year in December into the air as Powell aired on the dovish side. As such the sell off in the USD continues with the dollar now looking at loses over 3.5% against the Euro in the last few weeks. Even the positive news yesterday that President Trump has struck a trade deal with Mexico couldn’t support the dollar which is now at three week lows. The USD surged earlier in the year due to uncertainties around the global trade war with a risk off appetite dominating markets. However, with some of these uncertainties and worries waning there has been a reversal in this trade. Mexico was Trump’s first target and so global leaders and investors will be buoyed by the recent agreement and the expectation now is that Canada will return to the NAFTA negotiating table.

The euro has surged the last number of weeks particularly against the USD, long forgetting the 13 month lows that we saw. The euro, unlike the pound, has a string of market indicating data releases this week in the form of CPI figures, German unemployment and consumer sentiment. Yesterday’s IFO index also rose for the first time in 9 months in the latest indication that concerns over trade tensions could be easing. If this is the case then EUR/USD could return to its one month highs.

Political tensions could still be on the cards though and watch out at the end of the week for Italian government bonds as the local government looks to finalise its first budget which is expected to contravene EU rules. In effect the anti-austerity coalition government could kick back against the EU, a problem for Brussels from Europe’s fifth largest economy.

As the fallout from last week’s leadership battle settle’s the Aussie dollar has followed suit. Whilst the political uncertainty still remains the dollar has recently been driven by external factors, most notably the US – China trade tensions. These talks weren’t entirely productive last week and until they are resolved the Aussie dollar will remain on the back foot particularly due to the fact that there are no economic releases set for this week.

The recent agreement between Mexico and the US has put the pressure back on to Canada to return to the NAFTA negotiating table. Indeed Chrystia Freeland who is Canada’s Minister for Foreign Affairs cut short her trip to Europe to fly to Washington. Q2 GDP is set to be released this week and this will be the last major economic indicator before the Bank of Canada’s next meeting on September 5th. The BoC aren’t expected to raise rates once again, but if a draft NAFTA agreement is proposed and the GDP figures follow the recent inflation figures by beating expectations then a surprise could be on the cards.

Dairy prices continue to fall a factor that will eventually come round to hit the New Zealand economy and dollar. In the meantime though the Kiwi has started the week buoyed by the recent better than expected retail sales.