For the most part, its been another trendless 24 hours in forex land as the markets appeared content to bang around in current ranges ahead of CPI. While tax reform has again stumbled out of the gate, the dollar has recovered some semblance of composure after PPI has surprised to the upside, boosting expectations for tonight’s pivotal inflation print (CPI). However, it’s apparent that until more details are reaped from both the Fed and Tax reform, the market will second guess positioning and do an about-face on headline risk.
In a headline-giddy Thursday, there appeared to be a significant compromise brewing amongst Republicans, but given the bloated nature of the current Tax code, for every compromise tabled there seems to be another band-aid fixed elsewhere. Understanding and patience will be the name of the game for this to pass but it would not surprise me if we found ourselves back dead in the water next week.
The pound was the most prominent headline chaser falling to 1.3120 on an ambiguous headline ”BARNIER SAYS BREXIT TALKS HAVE REACHED DEADLOCK”. In fact, this comment was completely misread as he was simply referring to the ”divorce bill”. Then GBP rocketed to just shy of the 1.3300 level when German newspaper Handelsblatt says Barnier may offer the UK a 2-year transition stay in the EU market if the UK agreed to settle its financial obligations with the EU and sign a divorce agreement. The proposed extension sits well with the markets and reduces the likelihood of a “Cliff Edge” scenario, but this is not a new negotiating ploy so chasing top side sterling risk is definitely at one’s peril.
On the Fed Chair front, its expected this critical decision will be not arriving until November with the latest market straw polls indicating 50% of participants view Jerome Powell as the incumbent. This view has also weighed on dollar sentiment this week given his more centrist-dovish lean than the market's early front-runner Kevin Warsh.
What have we gleaned from this week?
The sum of these parts suggests buoyant risk appetite a less attractive US dollar, with higher Beta currencies like the AUD and kiwi the near-term shooting stars. But let’s see what surprises CPI may have in store.
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