Pound Sterling left alone as Brexit negotiations take centre stage

Pound Sterling: Brexit negotiations continue to cast shadow

The Johnson administration is facing a crunch week on Brexit negotiations. Last week, Number 10 put forward a solution into replacing Teresa May’s Irish backstop. Reactions from most sides were negative. Revisions were critically needed in order for it to be accepted by all parties. If negotiations fail, the PM will be required to ask for an extension in about ten days time.

As a result, Pound Sterling took a breather from its recent volatility as traders ‘wait and see’. The GBPUSD pair, shown below, showed prices to be hemmed in by levels at 1.220-1.240. Political catalysts will continue to determine the direction of the eventual breakout here.

Euro: Depreciates as investors fear a looming recession

For the Euro, the more importance factors are the macro headlines and ECB QE. Last week’s PMI on manufacturing and services were markedly poor. Talks were rife about the EU slipping into a recession. Investors may be upping their expectations of more QE down the road.

Consequently, note how consistently the Euro has been falling against the US Dollar. Prices slipped to new multi-year lows recently; each rebound melted away at the 50-day moving average (see below). Unless we see a turnaround on Euro macro stats, which lower expectations of more accommodative monetary policies, I expect prices to dip further.

Watch Aussie Dollar and Chinese Yuan

Meanwhile, in Asia the US Dollar is remaining strong as well. The Aussie Dollar, for instance, is on the verge of breaking new long-term lows against the greenback. This follows from the latest rate cut from the Reserve Bank of Australia on the October 1. The USDAUD pair nearly touched 1.500 last week (see Featured Chart).

While a reaction from this round number support is to be expected, I note sideways support emerging at 1.450 and 1.400. Hence the broad trend is for the Aussie Dollar to weaken beyond the 1.500 key level.

Another pair worth watch is the Chinese Yuan. The Sino-US tariff war is biting into China’s growth. The Chinese central bank (PBOC) has no choice but to weaken its currency. What’s is worrying is that a further depreciation here may set off a round of ‘competitive devaluation’ across the region.

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