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Pound steadies ahead of another important week in the Brexit saga

By Alex Edwards

The pound steadied on Friday, with less negative Brexit related headlines circling. And, although it was the worst performing major currency last week it’s showing some early signs of fight back this morning as investors seemingly brush aside the pessimistic weekend newspaper headlines, including one such headline from The Sun that there are currently 42 conservative MP letters to push for a vote of no-confidence in the PM, with 6 more letters required to trigger any vote.

Over the weekend it also transpired that five cabinet members emerged as the ‘Gang of Five’, whom have publicly thrown their support behind the PM, being Andrea Leadsom, Michael Gove, Liam Fox, Penny Mordaunt and Chris Grayling, albeit some are pushing May to change her Brexit plan.

The PM is due to give a speech to the CBI business lobby group’s annual conference today, and so there will obviously be a lot of focus on this. In terms of data this week, investors will have a keen ear on the Inflation Report Hearings.

The greenback weakened across the board on Friday with the US Dollar Index (DXY) falling by 0.7% to 96.43. US Federal Reserve Vice-Chair Richard Clarida commented in a CNBC interview on Friday that the U.S economy was in good shape although parts of the world’s economy are slowing and the central bank’s benchmark short-term rate is getting close to a “neutral” level. Adding to the dovish narrative was a WSJ interview with Fed President Harker who mentioned “at this point, I’m not convinced a December rate move is the right move…but I need to watch the data over the next few weeks” sending the USD another notch lower.

The US-China trade war also turned a corner over the weekend, with the outlook on a reconciliation turning a little more positive. President Trump noted that China had responded to his demands but had omitted four or five big issues and wasn’t quite acceptable. He indicated that he may not proceed with additional tariffs and hoped to close a deal with President Xi. However, this was all undermined by VP Pence and President Xi trading verbal blows at the ASEAN summit over the weekend, tempering market optimism.

There’s no U.S. data due today. In fact, it’s a pretty quiet week in general for data with Durable Goods being the main event on the calendar.

The euro witnessed some wild swings last week against. After having initially touched fresh yearly lows of 1.1215 vs. the dollar, it bounced strongly and ended the week at 1.1416. The euro received a boost from hopes that Italy’s Prime Minister Giuseppe Conte is willing to work with the European Union over the country’s 2019 budget. Italy’s Deputy Premier also said over the weekend that the country will stay with its reforms planned in the 2019 Budget.

On the data front, EU inflation numbers came out without any revisions. The year to year CPI change remained at 2.2 percent, while the core gauge stayed at 1.1 percent. The ECB expects core inflation to rise significantly over the next few quarters, according to Mario Draghi on Friday.

AUD/USD touched 2 ½ months highs on Friday of 0.7338, this on the back of dovish Fed comments. Vice chairman of the Federal Reserve Richard Clarida told CNBC on Friday that interest rates were near neutral, but indicated that a December rate hike is still possible. The news sent the greenback tumbling leading speculators to think that the Fed would pause sooner than expected.

AUD/USD opens at 0.7330 this morning. Market participants will now be looking to the RBA’s Monetary Policy Meeting Minutes tonight. Fed member John Williams is speaking at an event in New York today too, and after what we saw on Friday, we may get some reaction in AUD/USD.

The Canadian dollar was mostly unchanged on Friday, trading within a tight range vs. most majors. On the data release front, monthly manufacturing sales printed better than expected at 0.2% (forecast 0.1%) after a decline of -0.4% in the previous release. The October ADP Canada National Employment Report also showed that the number of those in jobs decreased by 23,000 from September to October.

Looking ahead on the data front and there are no scheduled releases in the first half of the week. All eyes will be on Friday’s monthly retail sales figures for September and the Consumer Price Index (CPI).

It was another strong day for the kiwi on Friday as we saw the local unit close the week a touch under 0.6880, a level we have not seen since June. This came largely as a result of a fall in the value of the US dollar, with the kiwi’s gains against the crosses being rather modest. The AUD also closed the week strongly which constrained the NZD/AUD to trading largely flat around the 0.9380 handle.