Pound Rallies on Brexit Development; Dollar Pares Gains

Updated on
  • EU negotiator may offer U.K. transition period with union
  • Dollar gains fade amid focus on inflation trends, Nafta

The dollar was nursing a small gain as the pound hogged the spotlight, roiled by wide swings in response to Brexit developments.

The pound shot to a session high, gaining as much as 0.5 percent versus the dollar, after German paper Handelsblatt reported that chief EU negotiator Michel Barnier may offer the U.K. a two-year transition period to stay in the union. The pound’s surge reversed steep losses that followed a report that Brexit negotiations had stalled. Meanwhile, the dollar pared its first gain in five days later in the session as Treasuries rose to fresh highs; the Bloomberg Dollar Spot Index was up less than 0.1 percent.

  • EU leaders will invite Barnier to start “internal preparatory discussions” on a Brexit transition deal and the post-Brexit relationship with the U.K., Financial Times reports. GBP earlier fell as much as 0.8% vs the dollar and had been lower against all of its G-10 peers as traders unwound sterling cross trades, buying yen and euro among other currencies
  • The dollar saw session highs after September PPI climbed 0.4% m/m ex-food and energy, double the estimate, putting the y/y rate at 2.2% vs 2.0% estimate. Friday’s September CPI and retail sales reports will be closely watched after the FOMC minutes Wednesday showed some members remain concerned about the sluggish pace of inflation
    • “There does seem to be a very important, persistent, underlying trend in inflation, and there, a lot of the time-series work would suggest that we have actually seen a reduction in the underlying trend rate of inflation that’s material,” Fed Governor Lael Brainard said Thursday
  • Separately, U.S. negotiators are said to present a proposal for a so-called “sunset clause” that would see Nafta expire after five years unless the parties can agree to extend it, according to a person familiar. Meanwhile, White House Chief of Staff John Kelly told reporters that the Fed chair pick is “some time away,” and there is “more to come” on interviews
  • EUR/USD was trading near 1.1836 after dropping to a new daily low at 1.1827 in afternoon trading as EUR/GBP longs were unwound. Earlier, EUR rose to the session high 1.1880, where leveraged accounts were quick to unwind recently set longs to lock in profits, according to traders in Europe familiar with the transactions who asked not to be identified because they are not authorized to speak publicly. EUR fell below technical support from its 55- and 21-DMAs, as earlier demand for EUR/GBP faded after that pair rose to its highest in a month
    • EUR was lower vs a majority of its G-10 peers; ECB President Draghi spoke in Washington and reiterated guidance that interest rates will remain low well past the horizon of buying bonds, adding that “the ‘well past’ is very, very important”
  • USD/JPY was trading near a session low of 112.13 seen late in the session as Treasury yields fell. The pair was approaching the weekly low at 111.99 seen Tuesday; technical support may be at the 200-DMA at 111.84
    • JPY gains were helped by a report of a very small earthquake in North Korea. The USGS said it was unable to determine whether the temblor was natural or man-made. The quake served as a reminder that the rogue state may be preparing to test short-range missiles in the near future
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