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Dollar weakens as risk appetite improves

By Alex Edwards

Risk sentiment has turned mildly more positive over the last 24 hours on hopes that US-Sino trade talks will yield some positive results by the end of the week. GBP/USD recovered approximately 70-80 points as investors unwound their long(er) USD positions. Major equity markets also traded higher as sentiment improved.

In other news, BoE Governor Carney spoke yesterday and warned of a no-deal ‘economic shock’. He said “a no-deal would be an economic shock for this country, and this would send a signal globally about re-founding globalisation. That would be unfortunate.” It wasn’t anything traders hadn’t heard before and was largely shrugged off. The Fed’s Powell also spoke, but again didn’t say anything to surprise traders – he really only reaffirmed that the Fed will leave monetary policy on hold for the foreseeable.

Cable traders will now look to CPI data, released at 9:30 this morning. If the headline prints sub 1.9% y/y we could see GBP/USD settle back below the 1.29 big figure. Meanwhile, it goes without saying that Brexit remains front and centre. Recent headlines about Ford preparing to move production lines out of the UK won’t be doing GBP any favours this morning.

The dollar was sold off yesterday as risk demand increased. Hopes that a new US government shutdown will be avoided and growing expectations that a talk between the US and China will be positive saw equity markets snap higher and the dollar offered across the board.

Fed Chair Powell also spoke yesterday. He said "today, data at the national level show a strong economy. Unemployment is near a half-century low, and economic output is growing at a solid pace. But we know that prosperity has not been felt as much in some areas, including many rural places…..there are pockets of regions and demographics all over the country who are not at maximum employment". It signalled to investors that monetary policy will remain on hold for a while yet.

Traders will be looking to US-China trade talks as well as US headline inflation data today. We could be in for a volatile day in FX markets.

EUR/USD has pushed slowly higher over the last 24 hours against a backdrop of a weakening greenback. There hasn’t been any data released in the last day that’s been worthy of mention, although Brexit remains in focus and traders will be looking to German Prelim GDP tomorrow for direction.

AUD/USD, like EUR/USD, traded higher yesterday as the greenback was offered throughout the day. The currency was also dragged higher by a well bid NZD. If the US-China talks progress positively over the next few days we could well see further upside in AUD/USD.

The Canadian dollar strengthened against the greenback yesterday on the back of gains in oil prices and as risk appetite was boosted by the potential de-escalation of the trade dispute between the United States and China.

NZD/USD gapped higher overnight after the RBNZ delivered its monetary policy statement. The central bank was less dovish than many traders were expecting, stating that they expected the OCR to remain at 1.75% through 2019 and 2020. A squeeze on short kiwi positions ensued and NZD/USD rallied from .6725 to .6850. The kiwi is stronger across the board, including vs. the pound and GBP/NZD opens in London at 1.8880.