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Pound recovers amid confusing Brexit headlines.

By Alex Edwards

The pound fell again on Friday as the Brexit saga continued. Theresa May has been seeking concessions from EU officials but seemingly not getting too far. GBP/USD was also dragged lower by the sell-off in EUR/USD on the day, but it wasn’t all negative for the pound and as the New York session got in to full swing the pound found a bid tone.

The recovery was helped – in part – by Theresa May’s office denying reports that she hadn’t got anywhere after meeting EU officials. Meanwhile, suggestions of a second referendum are now doing the rounds, but it’s not hurting the pound, which is continuing to push higher vs. the dollar this morning. In other weekend headlines, the Irish foreign affairs minister said that Brexit may have to be delayed if the UK submits an “entirely new” proposal on its withdrawal from the EU.

Anyhow, other than Brexit headlines and developments, traders look forward to UK CPI and Retail Sales this week. The Bank of England is due to make its monetary policy statement too, albeit we aren’t expecting any change in the base rate or too much change in the language of last month’s minutes.

The US dollar was strong through the early part of Friday, attracting safe haven demand following the release of weak economic data out of China. A small beat in US retail sales data also helped support the greenback and the dollar index touched on 97.71, a level not witnesses since June 2017.

Traders now turn their attentions to the US FOMC Statement and Fed Funds Rate on Tuesday/Wednesday. Fed Chair Powell will hold a press conference on the Wednesday, too. Consensus among economists remains that the Fed will raise interest rates; however, the real focus of this meeting will be on the Fed’s language about the central bank’s plan for the future.

Trading conditions may also start to thin out in the run up to the Xmas holiday period next week, and with this we may also see a bit of volatility.

The euro was smashed lower on Friday following the release of a weak set of European PMIs. In particular, French Services and Manufacturing PMI’s dropped below 50, signaling a contraction. The result seems to be partly due to the recent protests in Paris, which continue to weigh heavily on business sentiment. The composite PMI for the entire Eurozone also fell, but to 51.3, its lowest level since November 2014. According to reports on Friday, Italy and the EC are apparently still at loggerheads over the budget deficit target, which didn’t help the euro’s cause either.

Meanwhile, ECB rate hike expectations are slowly diminishing with money markets pricing in a 60% chance of a rate hike next calendar year, down from 75% late last week. This week’s data from the Eurozone will also likely impact these probabilities and traders will be looking to Final CPI (due today) and German Ifo Business Climate on Tuesday for more clues.

The Australian dollar finished last week lower, undermined by renewed concerns over the outlook for global economic growth. On Friday, we saw the release of Chinese Retail Sales data, which increased by 8.1% YoY in November, but well below the expected 8.8%. We also saw the release of China Industrial Production in the same period which rose by 5.4%, falling short of the market's expectations of 5.9%.

The risk aversion that set in following the release of this data affected most of the commodity currencies and the aussie struggled to recover, albeit it’s off its most recent lows in London this morning.

In the week ahead, AUD/USD traders will be looking to RBA Monetary Policy Meeting Minutes on Tuesday and employment figures on Thursday.

The Canadian dollar continued its downward momentum on Friday and closed lower against the US dollar for the fourth straight week. The risk averse nature of trading late last week and continued pressure on oil hasn’t done the loonie too many favours in the last few trading sessions. USD/CAD opens this morning at 1.3380.

The New Zealand dollar began Friday’s session hovering comfortably above the 0.6850 level, which has been a short-term resistance level for most of December. However, the NZD/USD pair came under heavy selling pressure as weaker-than-expected Chinese Retail Sales and Industrial Output saw a sell-off in global equities, which in turn led to the downward decline in the pair. The kiwi touched a three-week low of 0.6777 and is just over the 68c mark at the time of writing. Looking ahead, the local calendar is light, but the main focus this week domestically is third-quarter gross domestic product, due out on Thursday.