Morning Report: 02 October 2018

October 2, 2018

GBP. The pound started Q4 by making marginal gains against the dollar and further ground against the euro despite having a choppy session yesterday. A strong reading in the Markit Manufacturing Purchasing Managers Index for September, which beat forecasts by over a point, set sterling on its way up yesterday morning. Headlines stating that the UK will compromise on an Irish border to get a Brexit deal, likely stemming from the Conservative Party Conference, saw GBPUSD extend its gains. Strong rebuttals of the headlines from the DUP party, whose support May sought a coalition with, and comments regarding the border issue in Ireland from Brexit Secretary Raab saw GBPUSD give up most of its gains from earlier n the day. The pound has started on the back foot this morning as Politico reports Prime Minister May will make a concerted effort to drown out Boris Johnson’s big day at the conference. May will take to the airwaves this morning ahead of Johnson’s speech around 13:00 BST. Former Foreign Secretary Johnson is tipped to make his leadership challenge more transparent in his address this afternoon.

 

EUR. The euro is heading for the lower end of its recent trading range against the dollar at a breakneck speed, as worries about Italy’s fiscal position mount. Yesterday European Commission President Jean-Claude Juncker raised concerns about the Mediterranean country after he compared it to Greece, which entered a deep sovereign debt crisis in 2010 and saw its economy shrink by more than 30% in the years that followed. This morning the euro continued to head South as the head of Italy’s Lower House budget Committee Claudio Borghi retorted that Italy would be able to solve its fiscal problems if only it had its own currency. To make matters worse, Italian Manufacturing sector Purchasing Manager Indices dropped to the neutral level of 50, indicating very low growth is to be expected from this sector in the third quarter. Today sees the Eurozone Producer Price Index at 10:00 BST, while throughout the day European Union Finance Ministers continue to meet in Brussels.

 

USD. Despite posting losses against the loonie as markets reacted to news of a new trade deal, the dollar had a strong day yesterday when measured against the G10 currencies. Negative surprises in second-tier data were brushed aside as investors tuned into Trump’s press conference following the USMCA trade deal. With little data released today, eyes will be on Fed Chair Jerome Powell as he takes to the stage at the annual NABE meeting in Boston, but further commentary on the Feds dovish meeting is unlikely.

CAD. The loonie topped the G10 currency board for the second day in a row, fueled by reduced trade tensions and high oil prices. The new USMCA deal, which is not to be confused with a certain iconic 1978 disco hit by Village People, substantially improves the outlook for the loonie as NAFTA uncertainty no longer looms over business sentiment and Bank of Canada hiking intentions. With inflation close to the upper band of the medium term BoC inflation target of 3% and unemployment near multi-decade lows, it’s no surprise that a BoC rate hike on the 24th of October is now virtually priced in by fixed income markets.

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