Pound Wobbles as Week Starts

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Market Drivers October 17, 2016
Pound wobbles at start of trade
Euro CPI in line
Nikkei 0.28% Dax -0.68%
Oil $50/bbl
Gold $1254/oz.

Europe and Asia:
EUR CPI 0.4% vs. 0.4%

North America:
USD Empire 8:30

Currency markets were quiet at the start of the week with most of the majors rebounding slightly against the greenback as US yields retreated off the 1.80% level on the benchmark US 10 year Treasury bond.

The one exception was cable which once again came under heavy selling pressure on the Asian open after both Angela Merkel and Francois Hollande made tough remarks over the weekend regarding the EU position on Brexit. Both leaders reiterated that UK will get access to the common market unless the free movement of citizens is guaranteed.

This appears to be most contentious point of the Brexit negotiation and unless the parties reach a compromise, UK will face formidable challenges to its economy as it’s access to EU market will be cut off.

Cable dropped below 1.2150 but has found a few buyers at that level, although the pair was unable to climb above 1.2200 during London morning dealing. There is no doubt that the market in GBPUSD remains a standstill for the time being with traders just marking time as the key issues are now clear. Still the pair has not made fresh lows in over a week, suggesting that pound may be due for a small short covering rally as the vast majority of selling may done for now. The pair has basically carved out a wide 1.2000 1.2500 range in the aftermath of the flash crash and could begin to inch towards the upper end of that region as the week proceeds.

Meanwhile the eco calendar is very light today with only Empire Manufacturing and US Industrial Production on the docket. In Europe, the EZ CPI came in line at 0.8% on a year over year basis. This was still well below the 2% ECB target but shows that the region is no longer gripped in a deflationary spiral and therefore the ECB is unlikely to offer any additional accommodation beyond the current QE program.

With little on the calendar to move markets, the focus on FX is once again likely to be on yields and if the 10 year yield begins to slide further below the 1.80% mark, the rebound against the dollar is likely to extend as the day proceeds.

Boris Schlossberg
Managing Director

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