Risk sentiment was subdued going into the weekend following a poor week for US indices which saw Friday close with moderate gains, albeit down on the week, despite a strong performance from Europe to start Friday on a positive tone. The USD index found itself pressing fresh 7 month highs to end the week as US yields and rising USD demand support the growing expectations for a December rate hike from the Fed, there has been some moderate selling overnight but the greenback remains near the top of its recent high range. The Euro and GBP both struggled through much of last week, EURUSD breaking out of a 2 month range to the downside while pressure continued to weigh on the pound with any rally in GBP quickly running into sellers. In overnight trade Asian indices were mixed, while JPY and Euro outperformed, some risk aversion favoring safe havens as European stocks have opened in the red.
For GBP Brexit gossip and posturing will be the key driver, as PM May continues to look to take a firm stance on topics that, from a EU perspective, would favor a “hard exit”. Once again over the weekend we have seen comments from EU leaders, with Merkel and Hollande both referring to the free movement of people, citing the UK would not get access to an open market without some concessions around this. So much is still unknown and with that uncertainty markets tend to fear the worst, hence GBP weakness certainly feels at extremes for now, however things can get worse for the pound as it acts as a “shock absorber” for the UK economy, something the Bank of England’s Broadbent mentioned in press over the weekend. GBPUSD continues to hold back below 1.2300 area for now, with support between 1.2140 and 1.2090. EURGBP fell on Friday following Euro weakness but remains within the post flash crash range between .8960 and .9060.
Data from the US was mixed on Friday, PPI and retails sales figures were solid, while the University of Michigan confidence survey was worse than expected. We have seen this over the course of the last 15 months, when the US looks to be on a path to hike rates confidence declines, when they hold off it rallies but there remains plenty of data points ahead, and confidence is not something the Fed will be taking into account when they finally decide to raise rates. Industrial and Manufacturing production data headline today’s US calendar, but CPI readings due tomorrow will set the tone for the rest of the week for USD.