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Sterling slumps on Brexit impasse

By Jake Trask

GBP/USD dived on Friday as the prospect of the UK leaving the EU without a trade deal grew. UK PM, Theresa May was met by a frosty reception at an EU leaders summit in Salzburg and sterling was hit hard as a result. Pound bulls had been hoping that a breakthrough between the two sides could be made paving the way for a November trade deal to be clinched however May appeared to be isolated by the bloc forcing the PM into making an impromptu press conference on Friday where she berated EU leaders on their immovable stance. Cable had been close to pushing through the 1.33 handle for the first time since early July however with divisions laid bare the pound suffered its biggest drop in 15 months again highlighting how it remains entrapped by politics. The PM now has to face rank and file Tory’s at the Conservative party conference in Birmingham from the 30th September with calls for her resignation from Brexit hardliners growing louder by the day. UK macro data is thin on the ground this week so expect Brexit rhetoric and Wednesdays US Federal Reserve interest rate decision/statement to be the main drivers for sterling in the short term. GBP/USD currently trades around the 1.31 handle.

This week’s big event is Wednesday night’s interest rate decision from the Federal Reserve in the States with a hike in interest rates all but guaranteed. The current economic situation in America undoubtedly justifies the move higher however markets will be keen to see if Fed Chairman, Jay Powell echoes market sentiment about the possibility of a slowdown in growth from next year. The US economy has so far been impervious to President Donald Trump’s trade war with China however there is growing concern that the aggressive measures implemented by Trump will come back to haunt the world’s biggest economy. EUR/USD has risen steadily over the past couple of weeks with it currently trading at 1.1750 and should a dovish statement/press conference emanate from the Fed then a move towards 1.19 could be on the cards.

It looks set to be a relatively quiet week from the Eurozone with the only data release of note being Friday’s inflation estimate for September. A small uptick in CPI to 2.1% from 2% is predicted with the core reading also expected to rise marginally to 1.1%. The euro’s recent wobble appears to have come to an end as concerns over Turkey dissipate and ongoing concerns over the new Italian government’s budget are brushed over. Should Wednesdays Fed rate decision finally halt the dollar’s bull run then EUR/USD back at 1.20 could soon become a reality again. GBP/EUR sits at 1.1150.

AUD/USD has consolidated its position throughout September as the greenbacks march higher appears to have come to an end. With little data due from Down Under the US interest rate decision will be the main talking point and a dovish message from the Fed could see .73 broken for the first time in a month. GBP/AUD is at 1.8030.

Brent crude oil has moved above $80 a barrel this morning however USD/CAD remains relatively unmoved continuing to hover around the 1.29 handle. Fridays inflation number came in as expected at -0.1% m/m however the loonie got a boost from a better than expected Core Retail Sales figure of 0.9% m/m. GBP/CAD trades at 1.6960.

The RBNZ is expected to stay put on interest rates this week with a hold at 1.75% priced into the Kiwis value. We could see an upbeat message from the RBNZ however should the recent strong GDP number be highlighted by central bank head Adrian Orr. GBP/NZD trades at 1.9660.