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Crucial day for the pound as May faces cabinet showdown

By Alex Edwards

Brexit headlines dominated proceedings yesterday as news broke that the UK and EU have provisionally agreed to the text on the Brexit withdrawal agreement. While the text itself has been settled, the Financial Times reports that negotiations will continue over the coming days should political objections be raised by London or EU member states. The UK Cabinet will meet today to discuss the agreement and Prime Minister May is set to canvas each sitting Cabinet member individually throughout the day. Headlines report that PM May wouldn’t call a meeting unless she was confident she could win Cabinet support. While far from being a done deal, Brexit headlines remain positive which has seen a marked improvement in the pound.

Domestic economic data also supported the pound with UK wage growth coming in slightly stronger than expected. While wage growth grew to its highest level in nearly a decade, the unemployment rate did tick higher, tempering market optimism.

It’s another big day for the pound today. Inflation data is due at 9:30 followed by the Brexit Cabinet meeting at 2pm. Market participants are expecting the Cabinet to approve the draft, although are less sure about Parliament.

A stronger pound and euro dragged on the greenback yesterday as positive Brexit headlines dominated. The US dollar index which measures the performance of the dollar vs. a basket of currencies, was sold off in the European session, dropping 0.5% on the day, trading to an intraday low of 97.10.

Positive trade talks resumed between the United States and China, led by Treasury Secretary Steven Mnuchin, which also weighed on the greenback as market participants flooded back into riskier based currencies.

Little came from FOMC members Lael Brainard as the market now focuses its attention on a US core inflation figures for the month of October.

Brexit and problems facing Italy continued to drive direction for the euro. Moving more than 0.5%, the Euro rebounded strongly against the greenback yesterday and overnight to touch a high of 1.1320. It’s fallen back this morning, partly a reaction to the release of weaker than expected German Prelim GDP this morning, which printed at -0.2% vs. forecasts for -0.1%.

The Italian Cabinet is scheduled to meet to discuss the next move on the budget with the EU this morning, albeit Brexit negotiations will likely dominate the headlines. A second reading on European Q3 GDP figures are released at 10am, albeit markets are more interested in whether we’ll see a rebound in the Q4 numbers.

The Australian dollar bounced back above 0.72 US cents through trade on Tuesday, buoyed by renewed optimism surrounding Brexit and US/China trade relations. Positive trade talk headlines, coupled with news UK and EU negotiators are one step close to finalising a deal helped bolster investors’ demand for risk, driving the AUD off intraday lows at 0.7172 to touch highs at 0.7218.

US and Chinese trade delegates are playing a crucial role in shaping short term AUD direction, too. As a proxy to Chinese growth and subsequent demand for commodities the recent trade dispute has forced a swift and heavy AUD sell-off and continues to cap investors’ appetite to drive the currency higher. The AUD found additional support throughout trade yesterday after the Yuan rallied, shrugging aside extended downside moves towards the critical 7 handle. Should trade talks break down and the Yuan slip below 7 the door opens for a deeper AUD correction and drawback of the recent recovery.

In other news, Australian Wage Price Index printed in line with market expectations overnight and had little impact on the direction of AUD/USD.

The Canadian dollar moved lower through trade on Tuesday underperforming against most major counterparts. The Loonie gave up Monday’s gains, following oil prices lower, as Monday’s 1% uptick was undone and the month-long reversal deepened. The CAD battled the largest daily dip in the value of WTI Crude Oil since 2015 and continues to edge ever nearer to key supports and 12 months lows.

With little of note on the macroeconomic docket, oil prices and trade will continue to drive broader direction and flow.

NZD/USD has pushed gradually higher over the last 24 hours, supported by improving risk appetite. There was little by way of domestic data overnight and so kiwi traders have taken their cue from offshore events. This will likely to continue to be the case in the run up to the weekend.