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Pound in limbo as Brexit news continues to steer direction.

By Alex Edwards

The pound edged lower against the U.S. dollar on Tuesday as optimism for prospects of a Brexit trade deal with the European Union faded, again. This came not too long after GBP/USD hit its highest level since early August. With less than seven months to go before Britain is due to leave the European Union, markets should be prepared for even more volatility ahead.

On the local data front yesterday we saw the release of UK Jobless Rate which remained at 4%, the lowest since the winter of 1974-75. Unemployment continued to fall with 55K fewer people out of work in the three months to July. UK wage growth was also better than expected, rising by 2.9% in the three months to July. Today the macroeconomic calendar is empty with no scheduled releases. Traders will likely have half an eye on tomorrow’s Bank of England statement.

The US dollar marginally retreated in overnight trading, slowly unwinding from its position of strength for much of the week. The dollar Index fell 0.04% against a basket of currencies as risk appetite returned slightly.

It was a mostly benign day in FX markets as no new news on the trade dispute came to light. The market mostly gyrated within a tight range as the pall of Trump’s trade tariffs weighed on market sentiment. Uncertainty about what’s next in the China-US trade dispute, as well as its implications on global growth also left the majors trading within familiar levels. Nevertheless, there was some small movements as marginal improvements in risk appetite led to a small appreciation in some risk-aligned currencies.

EUR/USD bounced around the 1.16 levels yesterday and despite optimistic Eurozone data the common currency failed to hold above resistance levels. The monthly German ZEW Economic Sentiment showed a rise to a negative 10.6 this month from minus 13.7 in August. This was compared to the consensus forecast for a reading of minus 14.0. Meanwhile for the Eurozone, the sentiment index increased to minus 7.2 in September from minus 11.1 a month earlier. Markets expected the index to improve to just minus 10.9. The details of the report show that expectations about the Eurozone economy as a whole improved somewhat, whereas the outlook for Italy became gloomier.

Looking ahead todays sees the release of Industrial Production. Industrial output for the whole euro-zone is published after the main countries will have published their own data. Nevertheless, the overall number tends to provide surprises. A drop of 0.7% was seen in June and another slide cannot be ruled out for July.

The Australian dollar continued its bearish trend to break US 71 cents for the first time since February 2016 yesterday as traders continued to sell off the local currency. Opening the morning at 0.7110, the aussie moved initially lower to 0.7095 following the release of NAB Business confidence, which dropped to two-year lows. The main theme being a gloomy outlook by Australian companies & uncertainty over political leadership changes in August despite an overall positivity on the majority of key indicators.

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 extended its recovery through trade on Tuesday pushing comfortably beyond 0.76 and 0.7650. An uptick in oil prices fueled by US sanctions and Iranian exports coupled with a slowdown in US crude production for 2019 helped drive the oil led unit higher.

The loonie found renewed support amid NAFTA optimism as talks between US trade delegates and Canadian Foreign Minister Chrystia Freeland were reportedly “constructive and productive”.

With little domestic data on hand to drive markets the CAD will continue to find direction in ongoing trade developments. NAFTA remains crucial for the broader CAD outlook with approximately 75% of Canadian exports bound for the States. A failure in trilateral and bilateral trade talks could significantly damage the medium and long term economic outlook.

One of the worst G10 performers on the day, the NZD remained under pressure on Tuesday as it continued its downward trend; depreciating 0.3% against the world’s base currency and 0.2% against its rival across the pond. NZD/USD fell from 0.6540 to 0.6501 which represents a 2 and a half year low against the greenback and faired marginally better against the Aussie as the AUD/NZD cross ticked up to 1.0914 from 1.0890.