Forex Market Review (European Session) – Pound gains on Brexit optimism; euro struggles despite robust economic data

Christina Parthenidou, XM Investment Research Desk

During the European trading hours, the pound outperformed its peers as investors stood optimistic about Brexit developments, while the euro failed to find support on robust economic data out of the eurozone.

With Brexit negotiations expected to resume on Thursday, the pound was on track to post gains for the second consecutive trading day supported mainly by encouraging remarks made by the British Prime Minister Theresa May in front of business leaders. May backed a deal on a transitional period crucial for businesses so as not to face a cliff-edge after the country leaves the EU, saying that she wants to reach a detailed agreement on this period as “early as possible”. She also mentioned that throughout this period both sides (the other side of course being the EU) should have access to one another’s markets under current conditions, but she called businesses to be “realistic” about the time-frame needed to finalize the new long-term relationship with the EU. Pound/dollar gained 0.37% on the day, rising to an intra-day high of 1.3126.

In Eurozone, the IHS final composite Purchasing Manager’s Index (PMI) fell from 56.7 to 56.0 in October as expected, remaining at multi-year high levels and above the threshold of 50 that separates growth from contraction in the sector. Regarding the services sector PMI, it came in solid at 56.0 as anticipated, though, among the readings for the largest European economies, Spain posted the smallest growth with the relevant index declining more than expected to a nine-month low of 54.6 from 56.7, harmed by the political uncertainties in the country.

In another report, the Sentix index which gauges investors’ confidence in the eurozone jumped surprisingly to the highest level since July 2007 in November, climbing from 29.7 to 34.0, while analysts projected a smaller increase to 30.8.

Despite the mostly positive data, the euro followed a downtrend, breaking below the $1.16 key level, last trading at $1.1582 (-0.22%). Against the pound, the euro lost 0.44% on the day, falling to 0.8837 pounds.

In the US, the Senate started revising the tax code, with the House Speaker, Paul Ryan, arguing on Sunday that the outline is expected to remain similar to the current draft so that the tax bill could be agreed by both the Senate and the House of Representatives before the year-end. However, the idea that tax reforms could excessively widen the federal deficit concerns several Republicans as they recently claimed they would not support the package.

Besides that, investors have turned their focus to Trump’s tour in Asia, where he will have bilateral meetings with five countries including in his agenda issues on trade and North Korea.

Next on the day, the New York Fed President, William Duddley who is expected to retire in the mid-2018, will give a speech at the Economic Club of New York.

The dollar index was moving sideways around the 95 key-level during the session. Dollar/yen was also trading flat around 114.

The aussie managed to climb higher to $0.7657 ahead of the RBA’s policy meeting early on Tuesday. The kiwi reversed part of its earlier losses, though remained 0.12% down on the day at $0.6896.

Turning to commodities, oil prices stood near 2-year high levels after Saudi Arabia’s Crown Prince, Mohammed bin Salman who backs OPEC supply cuts, applied anti-corruption measures, arresting royals and ministers. WTI crude moved up by 0.70% to $56 per barrel and Brent surged by 1.18% to $62.80. Gold increased by 0.28% to $1,272.70 per ounce.