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 Manufacturing Purchasing Managers Index for September, which beat forecasts by over a point, set sterling on its way yesterday morning. Flash headlines, likely stemming from the Conservative Party Conference, stating that the UK will compromise on an Irish border to get a Brexit deal saw GBPUSD extend its gains and shoot up. Strong rebuttals from the DUP party, whose support May sought a coalition with, and comments regarding the complex border issue in Ireland from Brexit Secretary Raab saw GBPUSD give up most of its daily gains but ultimately dragged itself over the line. The pound has started on the backfoot 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. Former Foreign Secretary, Johnson, is tipped to make his leadership challenge more transparent in his address this afternoon.

EUR. At a breakneck speed, the euro is heading for the lower end of its recent trading range against the dollar as worries about Italy’s fiscal position mount. Yesterday European Commission President Jean-Claude Juncker fanned the concerns about the Mediterranean country after he compared it to Greece, that 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 travel 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 no, or 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 Minister continue to meet in Brussels for elaborate, taxpayer-funded lunches.

USD. Despite posting losses against the loonie for notable reasons, 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 overnight turned into the number one FX market darling as it sovereignly topped the G10 currency board for the second day in a row in a feel-good mood fuelled by the new NAFTA treaty and oil prices on a 3,5 year high. The new USMCA titled deal sounds a bit like the YMCA song and brings similar buoyant vibes to the outlook of 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.

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