Flextension agreed, but for how long?
Sterling lost ground on Friday with Brexit uncertainty continuing to sap confidence. A lack of clarity over the UK’s intentions was amplified by uncertainty over the EU stance towards a further extension. EU Ambassadors agreed in principle to an extension, but there was wrangling over the details with France initially indicating that it would only back an extension until November 30th. Overall, Sterling declined to test 1.2800 against the Dollar before recovering to near 1.2830 whilst against the Euro, settled little changed around 1.1574.
CFTC data recorded a notable decline in short, non-commercial Sterling contracts to a 3-month near 52,500 in the latest week from 73,000 previously, lessening the potential for further very aggressive position adjustment.
Throughout today, the House of Commons will debate whether to approve a December 12th General Election with expectations that it will be rejected amid parliamentary deadlock. The EU will also hold a final meeting to decide its extension stance, maintaining extremely high uncertainty. As of writing, Sterling holds around 1.2844 against the Dollar and the 1.1577 against the Euro in tentative conditions.
The US budget deficit increased to $984 bn for fiscal year 2018/19 from $ 779 billion the previous year. Given that the US economy has continued to register solid growth, the persistent budget deterioration will cause significant concerns over underlying trends. The US trade and budget deficits could prove to be an important source of medium-term dollar vulnerability.
Markets have priced in a further Federal Reserve (Fed) rate cut this week and the dollar gained some support on expectations of less dovish forward guidance. The dollar held steady on Monday against the Euro around 1.1090.
The German IFO index was unchanged at 94.6 for October and marginally below expectations. There was a small decline in the current assessment which was offset by a slight gain in the expectations component and the IFO stated that business confidence had stabilised. German yields moved higher on Friday which provided an element of currency support. The ECB confirmed that its bond-buying programme would resume on October 30th for settlement on November 1st. As we start a new trading week, the Euro is trading at 1.1089 against the Dollar.