Trade tensions hit Dollar
Christine Lagarde, Managing Director of the IMF, warned of important negative consequences of a ‘no-deal’ Brexit. Elsewhere, optimism rose on reports that the EU was prepared to be more flexible on the Irish border issue. Germany and Austria were reported as being “determined to avoid a ‘no-deal’ Brexit”, raising expectations that member countries would pressure EU negotiators to take more a conciliatory tone, underpinning Sterling sentiment, and raising hopes ahead ahead of this week’s Salzburg Summit.
Sterling peaked at 6-week highs near 1.3170 against the Dollar, and the Euro dipped below 1.1260 (last seen in early August). The Pound opens above 1.3150 against the Dollar, with political developments and Wednesday’s UK inflation data being the key considerations.
Yesterday saw slight gains from the Euro against both the Sterling and the Dollar, with inflation figures being confirmed at 2% on the headline and 1% on the core rate. The Bundesbank announced that the economy struggled due to weak car production, but it is expecting a rebound once manufacturers acclimatise to new emission standards.
Italian bonds increased and yield spreads narrowed, giving strength to the Euro, as well as a widely shared belief that a Brexit deal will be reached. There were also reports that the Italian budget deficit will be held at 1.6% of GDP, which increased confidence amongst traders. Early morning trading has seen little change today.
Regarding economic data there is very little today – Italian industrial orders being the only pieces of actual data, but very little volatility is expected. The most interesting news will be ECB President Draghi’s speech, however he is not expected to talk about monetary policy.
New York Empire manufacturing PMIs fell short of expectations, hitting a 4-month low of 19.0 for September. There was a slight moderation in the orders and prices components, although the overall data was still robust, with companies remaining optimistic over the outlook as pricing pressures continued. The Euro overall pushed higher as the Dollar index registered significant net losses, although it was unable to break above the 1.1700 level and drifted slightly lower in US trading. Earlier in 2018, the Dollar gained from trade tensions and the Euro registered net losses, but the single currency was resilient in Asian trading on Tuesday, with the Euro testing above 1.1700.