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US midterms in focus as Brexit headlines continue to drive direction in the pound

By Alex Edwards

GBP/USD pushed through the 1.30 figure on Friday morning as risk appetite improved, this a result of increasing optimism for a possible trade deal being struck between the US and China. It then pulled back 20-30 points in the afternoon as US jobs data printed stronger than market expectations. Brexit headlines were few and far between on the day, but the weekend was an altogether different story.

The Sunday Times reported that a Brexit deal was almost done. According to their unnamed sources, an all-UK customs deal will be written into the agreement governing Britain's withdrawal from the EU, which was enough to send the pound to $1.3060 against the USD, its highest since 22nd October. The PM’s office then said the Sunday Times report was speculative, but added that 95 percent of the withdrawal agreement was settled and negotiations were ongoing. The pound then further erased gains after The Telegraph reported that significant hurdles still remain in the Brexit negotiation process, as the uncertainty around the Irish border issue still looms. Moreover, UK Brexit Secretary Raab has taken a hard line on the Irish border backstop, apparently privately demanding the right to pull the UK out of the EU’s Irish backstop after just three months.

These latest reports suggest we might not get a deal this week, but the Brexit headlines will no doubt continue to dominate direction and trading in FX markets. In terms of data, we've got Services PMI at 9:30am today, which is expected to come in at 53.3 in October vs 53.9 in the last reading.

On Friday, the US dollar was supported by data that showed U.S. job growth rebounded sharply in October. Nonfarm Payrolls indicated the US economy added 250K new jobs in October, surpassing the 190K expected, although the September headline was downwardly revised to 118K from the previous estimate of 134K. The unemployment rate remained steady at 3.7%, while average hourly earnings were up 3.1% YoY, above 3.0% for the first time in over nine years. The dollar rebounded on the news, but not by much, as investors and traders seemed more attentive to the prospect of a US and China trade deal being struck before too long. According to a Bloomberg report on Friday, Trump had asked his cabinet to draft a deal and he apparently intends to sit down to dinner with Xi Jinping in early December to nut out the detail.

In the week ahead, investors will hear from the Federal Reserve on Thursday when the central bank announces its latest policy decision, which is expected to see its benchmark interest rate target range hold steady at 2%-2.25%. There will not be an accompanying press conference.

The main event this coming week will come from the political arena with midterm Election Day on Tuesday. Most recent polling suggests the Democrats will take control of the House of Representatives while Republicans are likely to retain the Senate, though the market is actually bracing for a post-election reaction that is similar to a presidential election. Either way, this week is one where the political risk will be front and centre, no matter which way Tuesday goes.

EUR/USD pushed above 1.1450 on Friday as investors seemed positive about a potential US/China trade deal. It then ran into a series of big offers above this level and quickly retreated, taking a further knock on the back of the stronger than expected jobs report from the US on Friday afternoon.

Europe is trying to understand what went wrong in 3Q 18. Growth disappointed at 0.2% quarter on quarter as investors are left wondering if the result is a one off. German industrial production and retail sales for September released this week may shed some light here. We’ll also see more PMI data across the region, but the recent release of flat Italian GDP in 3Q18 and another manufacturing PMI below 50, could potentially cause further budgetary conflict between Italy and the EU.

The Australian dollar was bolstered last week by the release of a better than expected trade balance surplus in the month of September. The currency naturally got a boost from investor optimism for a US/China trade deal, and AUD/USD pushed through the .72 figure, onwards and upwards to a high of .7258.

It then gave up these gains when New York came online and the stronger than expected US jobs report was released. Direction will now be dependent on tomorrow’s Melbourne Cup day interest rate decision, where it is firmly expected the RBA will keep interest rates on hold.

The Canadian dollar edged lower against a stronger US dollar on Friday, following softer than anticipated domestic labour market data. Despite a dip in the unemployment rate, softness across new jobs created and sluggish wage growth, coupled with a reduction in the balance of trade, forced the loonie lower.

Just 28% of analysts are pricing in a December rate adjustment now, a considerable disparity with that of the US wherein 72% of investors anticipate the Fed will tighten monetary policy. The contrast in jobs data on Friday only forced this gap to widen further and will likely keep a cap on medium term CAD gains.

Attentions are now squarely affixed to the weeks big risk event, the US midterms. The outcome of these elections has the possibility to drastically reshape not just US domestic policy but Trump’s administration’s ability to force change globally. Despite all the division between Trudeau and Trump and the ongoing trade debate, a republican win should benefit the CAD.

The NZD/USD pair initially rallied on Friday on the back of a Bloomberg report that Trump was hoping to reach an agreement on trade with the Chinese President at the Group of 20 nations summit in Argentina this month. The news pushed the pair up to 0.6689 and it managed to hold around these levels, up until later in the North America Session when US Payrolls data was released. Following this, it fell back to .6630 and it opens this morning a little higher at .6655.