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GBP/USD settles lower as UK/EU negotiations look set to intensify.

By Alex Edwards

GBP/USD pushed higher through the day on Friday as markets got more used to the idea of a Brexit deal being struck. Whilst Brexit was on everyone’s mind, markets were also keenly anticipating the release of US Non-Farm Payrolls that Friday afternoon. The data disappointed and sent the dollar lower vs. the pound, and when combined with the positive Brexit story, GBP/USD pushed even higher.

Of course, the Brexit story developed over the weekend with Bloomberg reporting that the EU was about to offer the UK a free trade deal, albeit they are set to reject PM May’s demands for “frictionless trade”. On a related note, Japan’s PM Abe said they would welcome Britain with open arms into the Trans Pacific trade pact.

But, despite all the Brexit positivity, GBP/USD has fallen back overnight and early this morning, and hangs on to support at 1.30 currently. Perhaps there’s a bit of caution out there as UK/EUR negotiations look set to intensify over the next couple of weeks, and it’s these headlines that will likely be the principal driver of the pound in the short, medium and long term. There isn’t a lot due this week in terms of data with Wednesday being the most important day for it with both GDP and Manufacturing Production due.

The dollar weakened slightly on Friday following the release of a mixed US employment report, which ultimately fitted the theme of a tightening US labour market. Non-farm payrolls kicked things off in slightly weaker territory than September’s reading, although this was largely mitigated by upward revisions from prior months. More telling, was the unemployment rate which fell to 3.7%, its lowest level since 1969. Adding to the broader narrative of the Fed’s thinking, NY Fed President Williams was interviewed shortly after the employment report and reiterated their commitment to a gradual tightening of monetary policy. Despite the low unemployment rate, President Williams confirmed that the rate remains accommodative and there was some way to go before reaching neutral territory.

Moving into the new week, the dollar is set to enjoy a bank holiday and a quiet start to the week.

It was an uneventful finish for the euro on Friday, with EUR/USD closing the week at 1.1520, down 0.60% from open on Monday. Trading in a tight range of 1.1490 – 1.1520, supporting the single currency was the release of slightly better than expeced German factory orders

With US Nonfarm Payrolls coming in lower than expected for the month of September, there was a small spike from 1.15 to 1.1550, before pairing gains shortly thereafter as unemployment rates came in lower at than expected at 3.7%. The focus this week will be on the ECB minutes released on Thursday along with several economic releases in Germany.

The Australian dollar’s downward trajectory continued through trade on Friday, consolidating moves below 0.71 despite broader USD weakness. Having broken key supports earlier in the week AUD/USD broke fresh lows touching 0.7044 before edging marginally higher into the close.

The greenback’s yield advantage and the burgeoning gap in monetary policy, highlighted last week by a hawkish Fed and cautious RBA, has forced investors to reconsider high yield plays. The USD has become the carry of choice and while there is some suggestion of USD out performance, an expected softening across commodity prices and an ongoing slowdown in Chinese growth are expected to weigh on the AUD into the end of the year, and beyond. A break below 0.70 could signal the next step in a broader correction and consolidated move toward 0.69 and 0.68.

Attentions now turn to Tuesday’s NAB business confidence report and Wednesdays consumer confidence print for macroeconomic direction through the week ahead.

The Canadian dollar was largely supported last week by the new trade deal between the United States, Mexico and Canada. Friday was dominated by employment data from both Canada and the United States.

Canada’s unemployment figures printed slightly lower than market forecasts at 5.9%, down from 6%, with employment rising by 63K jobs for the month of September. Trade balance was also positive, showing a surplus for the first time since December 2016.

With the United States also releasing their own set of employment figures at the same time, the USD/CAD oscillated wildly between 1.2890 and 1.2950 before moving slightly higher to close the week at 1.2945.

The New Zealand dollar followed its antipodean partner lower through trade on Friday falling through 0.6450. The kiwi failed to capitalise on broader USD weakness following a softer than anticipated non-farm payroll and earnings print. Extending its week and month long losing streaks, NZD/USD touched intraday lows at 0.6433 and looks set to continue its examination of multi-year lows over the coming days. Heightened volatility, a softening in equities and a sustained period of risk off trading have all but eroded fundamental support for the New Zealand dollar. Having broken 0.6450 the next level of technical assistance doesn’t appear until 0.6350 and there appears little in the way of short term upside on the horizon as falling consumer and business confidence, a declining terms of trade and a burgeoning yield gap all working against the kiwi dollar.