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Sterling’s direction dictated by Brexit.

By Jake Trask

Sterling continues to react to Brexit rhetoric rising and falling on comments that could lead to soft or hard departure from the EU. GBP/USD slipped overnight on reports that Labour MPs are likely to be ordered to vote against Prime Minister, Theresa May’s Chequers plan if it comes to be voted on in Parliament. With Conservative, Labour and other political parties annual conferences about to kick off there is likely to be a plethora of Brexit related headlines to lift and depress the pound over the coming weeks. Reassuringly for pound-bulls there continues to be intermittent supportive comments from the EU side with German Chancellor, Angela Merkel this morning stating she wants to see a deal done in November. This has recouped some of the losses incurred overnight and with little top tier data this week from the UK domestic headlines will likely continue to be dominated by politics.

Outside the UK, this week’s big news will be tomorrow evening's interest rate decision from the US Federal Reserve. The Federal Open Market Committee is overwhelmingly expected to hike rates to 2.25% however the accompanying statement/press conference will be scrutinised for clues as to whether we will see another move in December and what path policy will take next year. There is a growing school of thought that the US economy may have peaked and a slowdown from its current purple patch is likely over the next two years. Should the FOMC “dot-plot” which tracks each member of the FOMCs expectations of where rates will be over the next two years fall when it and other projections are published then it could signal the end of the dollar bull-run we have experienced year to date. US President, Donald Trump signed a revised trade pact with South Koreas President, Moon Jae-in yesterday his first such agreement since coming to office. The agreement and reports that the US and North Korea are set to announce another leaders meeting has buoyed risk assets with USD/JPY pushing up towards 113 and most European bourses opening higher this morning. EUR/USD trades at 1.1755.

The euro rallied yesterday as European Central Bank head, Mario Draghi turned hawkish on the inflation outlook for the bloc. Speaking in Brussels, Draghi stated “underlying inflation is expected to increase further over the coming months as the tightening labour market is pushing up wage growth.” The comments caught the markets off-guard and EUR/USD popped through 1.18 touching its highest level since June. It has since retraced ahead of the Fed decision with further gains likely should Fed Chair, Jay Powell send a dovish signal tomorrow. It’s a quiet 48 hours from the EZ with Thursday and Fridays inflation figures from Germany, Spain and the area as a whole the major data-sets due this week. GBP/EUR trades at 1.1155.

Domestically this week is very quiet from Australia with no big data or central bank speech due. A move to risk on trade overnight on the back of the aforementioned news re: Trump and North/South Korea has helped lift the commodity currencies at the start of the European session. All eyes will now be drawn to Washington for tomorrow night’s big event. AUD/USD is at .7250 and GBP/AUD sits at 1.8110.

Brent rallying through $81 towards $82 has not stopped CAD slipping against the greenback over the past 24 hours. USD/CAD which had briefly been under 1.29 last week is currently around 1.2965 as some dollar strength returns to the markets. As mentioned before all eyes will be on the Fed tomorrow however once the dust has settled we have Canadian growth numbers on Friday which is expected to rise 0.1% m/m. GBP/CAD trades at 1.7040.

This week’s big event from the Southern Hemisphere is Wednesday night’s interest rate decision from New Zealand where a hold at 1.75% is expected. The Kiwi has suffered over recent months as Trumps trade war has affected the Chinese economy in turn hitting sentiment for its antipodean trading partners. Despite this New Zealand posted a very healthy Q2 GDP figure of 1% last week, double Q1s gauge and higher than the 0.8% priced in by markets. It will be interesting to see RBNZ head, Adrian Orr makes reference to this in his statement and press conference. NZD/USD is at .6640 with GBP/NZD at 1.9780.