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Pound rallies on back of positive Brexit headlines.

By Alex Edwards

The pound rose against the dollar on Monday after the European Union’s top negotiator Michel Barnier said an agreement for Britain to leave the economic bloc might be reached in the coming weeks. Following the news the GBP/USD pair jumped above the 1.3000 level mid-European, reaching a 5-week high of 1.3051.

On the local data front yesterday Gross Domestic Product (GDP) accelerated in the month of July, courtesy of a sharp rise in motor trading, lifting output to its quickest pace in nearly a year. GDP expanded by 0.3% in the month, above the MNI median forecast of a 0.2% rise, this following a 0.1% rise in June. That took growth in the three months to July to 0.6%. Industrial Production also rose by less-than-expected in July, up by just 0.1% mom, while manufacturing output contracted 0.2%.

Looking ahead today we will see the release of UK Jobless Rate which is expected to remain at 4.00%. Average earnings data will be closely watched at the same time.

The US dollar retreated marginally in trading yesterday, losing some ground against most currencies. The US Dollar Index (DXY) shed 0.27% on the day to open at 95.15 against a basket of currencies.

With little on the economic calendar to drive markets, investors took stock of current trading conditions and moved within a tight range for much of the session. Between a surprisingly strong jobs report and a further escalation in the US-China trade war, the dollar took the initiative early in the week and extended its gains from Friday only to slowly lose some of that ground throughout the American session. Nevertheless, the USD remains firmly on the front foot, moving into Tuesday.

The catalyst for the DXY retreat came from Europe with sterling and euro both appreciating marginally against the Greenback after EU Chief Negotiator Barnier noted a potential timeline for a Brexit Deal. Commodity currencies, however, didn’t fare so well with the CAD, NZD and AUD among the worst performers on the day.

The euro edged higher through trade on Monday, creeping back through 1.16 to touch intraday highs at 1.1612. It’s pushed even higher overnight. With little domestic data on hand to drive direction, attentions were focused squarely on resuming US and European trade talks. The market found confidence in reports that negotiations were moving forward, with Trump and the US Trade Representative Office seeking to commence congressional consultations in a bid to fast track preliminary deals, ahead of a November follow up.

While there are broader concerns Trump could renege on promises to waylay tariffs on EU automakers, a promise from EU negotiators to import more LNG and soybeans seems to have placated the President for the time being and a move to securing longer term outcomes appears plausible moving into the end of the year. With little headline data on hand to drive direction through trade on Tuesday our attentions remain focused on ongoing trade developments ahead of the ECB policy announcement on Thursday. With broader USD upside still intact we expect investors will continue to sell into rallies above 1.16/1.1650 while short term support holds firm on moves approaching 1.1350.

The Australian dollar saw limited movements to start the week, holding steady at support levels of 71 US Cents. Opening the morning treading water on renewed trade concerns between the United States and China, AUD/USD was muted as traders largely ignored the release of China’s CPI print for the month of August, which came in unexpectedly higher at an annualised rate of 2.3%.

The aussie extended to intraday highs of 0.7130 during the European session with gains eventually paired back to test the 0.71 handle during North American trade.

With the deteriorating Australian dollar continuing to face pressure from news both domestically and abroad, a further test of support at 71 US cents could possibly occur.

The Canadian dollar edged higher through trade on Monday, bouncing off 7-week lows. As ongoing NAFTA negotiations appear to have stalled, the loonie has found good support, proffered by the Bank of Canada and an open possibility the monetary policy committee may hike interest rates again before the end of the year.

Interest rate upside is the primary prop supporting the CAD at present as broader trade concerns and softening oil prices weigh on the commodity driven unit. NAFTA continues to cast a spectre of uncertainty over the short and medium-term outlook with key sticking points yet to be resolved. With talks on hold until after US trade officials return from the EU today, we can expect little movement outside current ranges.

The NZD traded in a narrow range overnight, anchored between 0.6520 and 0.6545. The kiwi also shed 30 pips against its Australian counterpart with the likely catalyst for the movements being a slight elevation in risk appetite. In what is a quiet week on the domestic data front for the kiwi, the domestic unit will continue to take its cue from offshore datasets and developments in global risk sentiment. Of particular interest to NZD/USD traders will be CPI and PPI measures out of the world’s largest economy later this week, which are set to be followed up by retail sales numbers for August on Friday. With the interest rate differential between the 2 currencies continuing to move in favour of the greenback, any upside surprises in these reads will likely put the Kiwi on the back foot as markets adjust their rate hike expectations.