Global Themes

Pound, Euro toil through on-going political issues
- Irish backstop remains focal issue
- Euro rocked by Italy’s budget woes
- CAD weaker on oil prices

GBP

Irish backstop remains focal issue
The Brexit saga rumbles on and the lack of progress in a relatively uninspiring European Union (EU) summit has left Sterling sagging. GBP/USD is approaching the key $1.30 support level against the US Dollar and GBP/EUR remains moored below €1.14. There is a hint of optimism from both the UK and EU of reaching a deal still, which is helping prevent the British Pound fall off a cliff-edge.

However, the contentious issue of the potential land border between the British province of Northern Ireland and Ireland, is keeping talks in deadlock. At the core of the disputes is the so-called “Irish backstop”, which is an insurance policy to ensure this border remains open in case a trading relationship is not in place in time. If no deal is reached and the UK leaves the single market and customs union without an Irish backstop agreed, there would likely be a hard-border.

There is still no clear solution to break this stalemate, but UK Prime Minister Theresa May is hoping to extend the transition period by a few months to help talks progress. However, this does not help resolve the Irish backstop issue and has only riled the Eurosceptics lawmakers in the Conservative government. Ms May also faces a rebellion from her parliamentary partners: The Democratic Unionist Party (DUP). The DUP has threatened to vote against the budget if she concedes to the EU's demands over the backstop to only apply to Northern Ireland. Political pressures are beginning to heat up for the PM and the pound could suffer significant downside risk.

A chaotic no-deal Brexit threatens to send Sterling plunging south towards $1.20 against the US Dollar. Against the Euro, whispers of parity are beginning to unnerve British importers needing to buy Euros. For now, the talks remain in limbo and Sterling remains fragile.

EUR

Euro rocked by Italy’s budget woes
The Euro has come under selling pressure today after the European Commission criticised Italy’s new populist budget. Rising political tensions in the Eurozone are beginning to weigh heavy on the common currency as it lingers around 1-week lows against the US Dollar, sub-$1.15. The Commission has warned that the planned government spending was too high, and the structural deficit would rise, meaning that Italian public debt would not come down in line with EU rules (source: Reuters).

EUR/USD has been trading in an even tighter range over the past 3-weeks, between $1.14 and $1.16. Since June, the currency pair has traded between $1.18 and $1.13, so currently hovering above $1.14 leaves the pair susceptible to further downside should the key $1.14 level break today. With little high impact data from either the US or the Eurozone today, the direction of EUR/USD will likely depend on technical trading and any political developments ahead of the weekend.

CAD

CAD weaker on oil prices
The Canadian Dollar weakened to a one week lows against the US Dollar yesterday, as oil prices fell. The price of oil, one of Canada's major exports, slumped to a one-month low, pressured by the fourth weekly increase in US crude inventories. CAD fell over 1% from the week’s high from C$1.2912 to C$1.3087. However, despite the lower oil prices and CAD falling, it has strengthened against the British Pound, with GBP/CAD dropping from C$1.7250 to C$1.70 over the month, showing the real impact of the ongoing Brexit talks.

Today, Canadian inflation data for the month of September and retail sales for the month of August will be released at 1:30pm. Inflation is expected to drop from 2.8% to 2.7% y/y, however it is expected to rise from -0.1% to 0.0% m/m. Retail sales data for the month of August is expected to remain flat at 0.3% m/m. If the data falls below expectation this could add to the CAD’s woes, however, on the flip side, a strong inflation report could allow a recovery of the recent losses made. 




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