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Pound slips as optimism for an imminent deal slowly fades.

By Alex Edwards

GBP/USD slipped under 1.31 yesterday as uncertainty about Brexit lingers on, and some of the recent optimism for a deal fades. It’s not been helped by rumours that Theresa May could ask the EU for more time to get agreement on a draft within her Cabinet. The PM is set to meet with her ministers again next week and unless she gets more time from the EU, if they can’t agree on a proposal by then, the writing could be on the wall for the pound.

Meanwhile the USD made solid gains across the board yesterday, including against the pound as the Fed left monetary policy unchanged last night. The central bank looks set to continue its tightening cycle after it pointed to a healthy economy.

The 24 hour trend has been lower, but GBP/USD could get a break this morning should UK Q3 GDP print better than market forecasts. According to some reports, the growth rate is expected to see the first quarter’s rate triple while rising 0.6% over the quarter. We’ll find out at 9:30am.

The US dollar advanced across the board on Thursday following the Federal Reserve’s commitment to tighter monetary policy. As expected the FOMC left rates on hold but proffered an upbeat statement and assessment of future economic growth, little changed from its last meeting in September. Inflation remains near 2 percent, the Fed’s target mark, while the labour market continues to drive improving consumer confidence and an uptick in consumer spending.

The dollar index advanced six tenths of a percent, recouping much of the losses sustained in the wake of Tuesday’s congressional midterms. Initial fears Democratic control of the House would stifle future fiscal stimulus and forestall additional tax cuts weighed on the world’s base currency as investors priced in a moderation in the pace of growth and a possible adjustment in Fed policy. Thursday’s FOMC statement has helped assure investors the Fed will honour its commitment to monetary policy normalisation and rejuvenated calls for a December rate hike.

Attentions now turn to producer inflation data, as a precursor to underlying consumer price pressures, and consumer sentiment as key macroeconomic drivers into the weekend.

The Euro fell through trade on Thursday, giving up Tuesday’s gains and slipping back below 1.14. Mixed domestic macroeconomic indicators coupled with strong and upbeat Federal Reserve rhetoric combined to drive the USD higher and force the common currency toward intraday lows at 1.1356.

French and German trade balance numbers evidenced a mixed assessment of European economic performance and did little to dispel concerns the broader European economy is struggling to stave off a period of sustained sluggishness. This persistent softness paired with commentary from the FOMC, following its November policy meeting, drove the euro lower as the gap between economic performance and central bank monetary policy continues to widen.

The aussie failed to push beyond 0.73 on Thursday, touching intraday highs at 0.7295 before moving toward intraday lows at 0.7249 following the Fed’s commitment to tighter monetary policy. With little domestic data on hand the AUD was at the mercy of offshore stimuli and succumb to broader USD upside.

Despite failing to break above 0.73 there is a sense of renewed optimism surrounding the AUD. Concerns surrounding the outlook of US fiscal stimulus and the ill effects of political gridlock, coupled with an improving outlook for US/China trade relations have emboldened investors to drive the AUD higher and prompt a break outside a 9 month downtrend channel.

With little of note on the domestic docket focus returns again to key trade discussion with the longer term AUD outlook heavily reliant on the next round of trade talks between Trump and XI Jinping at the end of the month. Ongoing positivity could foster a break above 0.73 and drive renewed short term support for the AUD as a proxy to Chinese growth.

The Canadian dollar slipped lower through trade on Thursday. With little domestic data on hand to drive direction the loonie suffered as a result of USD upside following the Fed’s commitment to normalising monetary policy. Investors were seeking assurances the FOMC would maintain the current program of interest rate adjustments following the shift in political power earlier this week. Concerns Democratic control of the House would likely stifle fiscal stimulus and obstruct future tax cuts weighed on markets and heightened fears for a correction in Fed decision making. Confirmation the FOMC will maintain its current policy setting emboldened USD bulls and forced the CAD lower.

The latest Fed statement only highlights the widening gap between US and Canadian monetary policy with markets pricing in a fed rate hike before year end, while the BoC are expected to leave rates on hold into the new year.

Attentions now turn to the US docket while US/China trade relations continue to driver longer term direction. A resolution to recent trade hostilities could help drive confidence in Chinese growth, fostering an uptick in oil prices and supporting a bounce in the CAD. With Trump and Xi Jinping scheduled to meet at the end of the month we expect short term range bound trading with breaks driven by headline data events.

The kiwi gave up some of its mid-week gains overnight as the greenback strengthened across the board. Moving into the close of the week, the kiwi has little to motivate momentum but will look to US PPI figures for guidance. The strong employment figures released earlier in the week will likely continue to provide good support to the NZD.