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Pound higher but remains vulnerable to Brexit headlines and uncertainty.

By Alex Edwards

The pound continued its march higher as it hit a three-week high yesterday. In fact, it popped higher again this morning, only to lose 20-30 points in quick time as Downing Street has stated this morning that Theresa May is not due to make any public statement today, quashing some of the rumours of the last few hours. Traders are also a little nervous about any Irish border backstop agreement potentially being open-ended, which is undermining the quid this morning, too.

In the absence of any domestic data yesterday, or today, the market took direction from the Brexit headlines with reports suggesting a divorce deal is close. Insiders reported that PM May called her Cabinet in on Thursday to discuss the subject with one official commenting that “the Prime Minister never brings the cabinet together to tell them what’s going on. That’s not her style. It feels to me like the deal is practically done”. Despite this bump in optimism, Brexit headlines remain confusing and conflicted, as above, which has kept a bit of a lid on any further GBP/USD gains.

Across the Atlantic, the risk-off sentiment spilled over from equity markets and weakened the greenback. Conversely, the pound has been well supported in this environment as the USD weakened substantially across the board.

The USD fell on Thursday, not helped by the inflation miss yesterday afternoon. The US dollar index, which measures the greenback’s strength against a trade weighted basket of currencies, touched a near two-week low of 94.99. The CPI (inflation) numbers were undermined by a slower increase in the cost of rent and falling energy prices, as underlying inflation pressures appeared to cool slightly. The headline number was up 0.1% vs 0.2% and the core was also weaker than expectations at 0.1% vs 0.2%. In a separate report, the number of Americans filing for unemployment benefits unexpectedly rose for the week ending Oct 6th. Claims rose by 7,000 to 214,000 but still remain at a 49-year low.

Meanwhile, the rout in US stocks subsided yesterday and following the 4% decline in equity markets yesterday, markets recovered through the New York session to finish the US session closer to unchanged, at least compared to yesterday, with a report that Trump and Xi will be meeting at the G20 in November, helping matters.

Looking ahead, we have US Consumer Sentiment and Inflation Expectations today, as well as two Fed members speaking.

The euro maintained its positive momentum and held above the 1.15 handle through yesterday after the European Central Bank was positive in its policy meeting minutes for September, released yesterday. It seems policy makers are on plan to end their stimulus program this year. The single currency has also done well against a backdrop of a weakening greenback and is showing signs of making a sustained mover through the 1.16 big figure.

In other news yesterday, figures yesterday showed that French Inflation declined for the month of September, falling back by 0.2% after a rebound in August of 0.5%. More recently, German Final CPI printed in line with market expectations this morning.

The Australian dollar clambered back through 0.71 US cents yesterday, however investors appear cautious of extending upside gains ahead of a key US Treasury Department currency report. Having traded sideways for much of the previous Australasian trading session the AUD found support following a broader USD and equity sell off.

The aussie was also generally well bid following the release of a fairly upbeat/neutral Reserve Bank Financial Stability Review, released overnight. The central bank warned of rising global trade tensions and the potential for volatility in global financial markets. They also seemed relatively non-fussed by local tightening credit conditions and the slowdown in the housing market.

China trade balance also printed well above market expectations, lending more support to the local unit. The data showed that exports surged despite the ongoing trade concerns and the trade surplus with the US hit a record.

The Canadian dollar edged higher on Thursday on the back of ensuing risk aversion. Equities continued to trend lower overnight; the Dow Jones Industrial Average closed down more than 2% and has shed more than 1,300 points since Tuesday.

On the local data front yesterday, New Housing Price Index (NHPI) for August was mainly unchanged. In the last 12 months, new house prices rose 0.4% year over year in August, with annual price advances gradually slowing since October 2017.

A good session for the kiwi overnight as the local unit capitalized on a weaker than expected US CPI print from the US. NZD/USD rose 40 pips on the news and finished up 1.3% on the day to reach levels around 0.6530. With very few risk events ahead for the NZD, it will continue to take cues from global risk sentiment, commodity prices and further potential fallouts in equity markets. On the technical front, NZD/USD remains well supported at the 0.6420 level with any topside moves expected to meet resistance on moves approaching 0.6540.