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Pound up ahead of today’s central bank announcements.

By Alex Edwards

The pound edged higher on Wednesday vs. the US dollar following a rise in optimism over prospects for a Brexit trade deal with the European Union. According to reports, EU may redraft the Irish Brexit protocol to appease the UK. Meanwhile European Commission head Jean-Claude Juncker renewed a pledge of close trade and security ties with Britain post-Brexit, helping lift sentiment. GBP/USD hit an overnight high of 1.3079.

Looking ahead today the Bank of England meets for its monetary policy meeting, at which it is expected to keep rates on hold at 0.75%. We’re not expecting to get any forward guidance either but traders will be listening closely for any Brexit related comments.

The United States Dollar Index (DXY) moved marginally lower against a basket of currencies after another, mostly benign day on the economic calendar. There was however quite a few headlines to contend with which drove market sentiment throughout the day, mostly trade related.

Ultimately the stark reality of what President Trump’s trade policy shift could look like has rattled markets. It hasn’t been helped with the President’s recent escalation of the trade conflict, threatening a further $267bn worth of tariffs. There was a glimmer of hope with US Treasury Secretary Steve Mnuchin inviting China to re-open trade talks. The news bolstered emerging markets and commodity currencies.

Fed Governor Brainard, a key member of the FOMC, also spoke overnight. Interestingly, she echoed comments from other members of the FOMC that monetary policy may need to move faster and into restrictive territory. She warned of imbalances in the yield curve but ultimately the market interpreted her speech to suggest the Fed intends to tighten more than the market currently has priced in. Moving into Thursday, attentions remain affixed to the headlines and the CPI report due later in the day.

Despite weaker-than-expected Eurozone Industrial Production the euro advanced against the U.S dollar moving from intraday lows of 1.1570 to highs of 1.1649. The data showed fresh evidence of weakness within the Eurozone economy; the -0.8% contraction in production on the month could have put significant pressure on the euro. Alas, the pair is being supported in a risk-on environment and is currently trading at 1.1625 at the time of writing.

Looking ahead, there is a slew of economic data today; German Final CPI - the preliminary estimate for August, stood at a monthly increase of 0.1%. The final measure will likely confirm it. Any change in the German number will impact the all-European final figure due the following week. French Final CPI - saw an increase of 0.5% m/m in August according to the initial read. This will likely be confirmed today too. Markets will also have a close eye on the ECB rate decision and accompanying presser. The European Central Bank reduces its bond-buying scheme at the end of the month to €15 billion from €30 billion - it intends to end purchases at the end of the year. Draghi and co. are unlikely to make any announcements. However, the recent drop in inflation and trade concerns may push them to paint a more dovish picture. In addition to the tone of the presser, the ECB releases new CPI forecasts in this meeting. Any upgrade or downgrade of inflation and growth forecasts may be indicative of the next move by the central bank although no big changes are on the cards. If Draghi says that downside risks have increased, it could be more meaningful.

The Australian dollar traded within a tight range for much of Wednesday’s Asian session, with little to drive direction on the economic calendar. However, sentiment quickly shifted later in the day on reports that US Treasury Secretary Steve Mnuchin has invited China to attend trade talks.

Australian employment data, released overnight, also printed better than expected. Headline employment change printed better than expected at +44k vs. and expected +18.0. Unemployment came in at 5.3%m as forecasted. It was a big beat and AUD/USD had rallied overnight, trading just shy of the .72 figure in London this morning.

The Canadian Dollar fell against a basket of other currencies on Wednesday. The USD/CAD pair fell a 24-hour low of 1.2980 the lowest level since August 31. The loonie is being supported by higher crude oil prices, NAFTA sentiment and by a weaker US dollar.

On the local data front today we will see the only release being New Housing Price Index (NHPI) for the month of August. New home prices are expected to increase again in August by 0.1%.

The NZD benefitted from USD weakness overnight as the USD fell sharply during the US session as positive news on the trade front filtered through to markets. NZD/USD jumped from 0.6503 in early London trade to touch highs of 0.6566 representing a near 0.5% advance on the day. An article from the WSJ reported US treasury officials had invited Chinese officials to meet in the coming weeks for trade talks, with the news pushing the CNH 0.7% higher on the day and taking the AUD and NZD along for the ride. AUD/NZD also rose from 1.0900 to 1.0944.