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Brexit talks resume in Brussels

By Jake Trask

Sterling has started the European session on the front foot this morning with modest gains vs most of its peers on Brexit optimism. UK Attorney General, Geoffrey Cox and Brexit Secretary, Stephen Barclay are due to resume negotiations with an EU delegation in an effort to trying to find a breakthrough with regards to the contentious Irish backstop situation. Brexiteers in the UK are ideally looking for legally binding changes to the text or a supplementary annex added to allay fears that we could be tied into a customs union with the EU indefinitely however a change in the guidance issued by the Attorney General confirming the backstop is temporary may be enough to win them over even if there isn’t a change to the text. If Cox can assure Prime Minister, Theresa May and MPs that the backstop will not last indefinitely then we could see Mays plan passed when it is scheduled to be voted on next Tuesday in parliament. You would likely see a considerable jump in the pound should it pass as Brexit uncertainty evaporates however at present it looks like an extension of Article 50 is more likely to allow more time for a deal to be done. GBP/USD trades at 1.3170 ahead of a UK Services PMI which is expected to show the sector has ground to a halt. Bank of England Governor, Mark Carney is due to speak before the House of Lords Economic Affairs Committee later in the day so expect plenty of warnings on what “no-deal” could mean to the UK economy.

The greenback remains well bid across the board as last week’s upbeat GDP print continues to add support. EUR/USD continues to trade between 1.13 and 1.14 however despite the upbeat US growth data USD/JPY has failed to get a foothold above the 112 handle with a move higher dependent on positive Brexit developments in the short term however a resolving of the US/China trade dispute will likely be the main catalyst for a concerted push higher. The main data-set from across the pond today is the monthly ISM Non-Manufacturing PMI which is due to post 57.4 up from 56.7 seen previously. Tomorrow sees the APD Non-Farm employment reading ahead of Fridays official government figures.

As well as Brexit negotiations the other main domestic event for holders of the euro will be this weeks interest rate decision from the European Central Bank due on Thursday. No change in benchmark rates is all but guaranteed so bank chief, Mario Draghi’s comments on the state of the blocs economy will likely be the main talking point. With latest data showing the German and Italian economies treading water will Draghi announce a resumption of his programme of cheap bank loans, known as targeted longer-term refinancing operations. Draghi may decide to hold back on any stimulus announcement this time round with a Brexit deal and resolution of the China/US trade impasse possible by month end.

The Reserve Bank of Australia kept interest rates on hold again overnight maintaining the 1.5% seen since August 2016. Some Australian banks expect rates to be cut later in the year in an effort to counter falling house prices being seen in Melbourne and Sydney however RBA Governor, Philip Lowe currently sees this drop as more of an “adjustment” after rapid rises seen over the past few years. There is more top tier data due tonight with 2018 Q4 growth figures being published an uptick of 0.5% from the previous quarter eyed. AUD/USD continues to trade sideways just below the .71 handle. GBP/AUD is at 1.8610.

The loonie remains under pressure following on from Friday’s under-par GDP print for December. USD/CAD is up to 1.3340 with extra pressure being applied to CAD from a slipping in the price of Brent Crude oil to $65pb from $67pb seen since Friday. All eyes will now be focused on the Bank of Canadas interest rate decision due tomorrow afternoon with the focus being on any changes of language in the accompanying statement. GBP/CAD sits at 1.7580.

The kiwi dollar is lower this morning with NZD/USD dropping below the .68 handle as a slight risk off mood hit Asian markets. Its likely Chinas decision to lower its GDP target this year to 6-6.5% was the main reason for a sell-off in Asian markets which pulled the kiwi down with it. GBP/NZD sits at 1.9375.