Pound Witnesses Dizzying Trading Session

Daily Analysis - 05/12/2017

Brexit Drama Leaves Investors Clueless on Future of Divorce Negotiations

The British Pound fluctuated wildly on Monday as investors reacted to the numerous twists and turns that unfolded on a crucial day of Brexit negotiations between UK Prime Minister Theresa May and top European Union officials. One-day volatility in Sterling spiked to a three-week peak after an EU spokesman said more progress was necessary on the Irish border issue and rights for EU citizens.

Brexit Deal Falls Through

The UK and the European Union ended a flurry of top-level diplomatic negotiations on Monday without reaching a deal on the terms of their divorce, as an agreement on the status of the Irish border continued to remain the main sticking point. However, leaders from both the sides said they were within striking distance of arriving at a consensus, setting the stage for hectic back-channel talks ahead of a key EU summit next week.

Prime Minister Theresa May is under increasing domestic pressure to reach an agreement on the divorce issues before EU leaders meet on December 14^th to determine whether to kick-start talks on post-Brexit trade arrangements. The British Pound fell sharply against the US Dollar following a joint press conference by European Commission President Jean-Claude Juncker and Theresa May announcing no deal had been reached. The GBPUSD pair gave further ground early Tuesday to currently hover around 1.3450.

Australia’s Central Bank Keeps Interest Rates on Hold

As was widely expected, the Reserve Bank of Australia has left the benchmark cash rate steady at 1.50% for the 16th straight month citing flat wages and inflation. The decision comes after Governor Philip Lowe signalled in late November that there was no compelling case for any immediate change in policy stance. Governor Lowe reiterated that outlook on Tuesday, noting that keeping rates on hold was consistent with sustainable economic growth and meeting the Central Bank’s inflation target.

Policymakers have been grappling with record low wage expansion and the absence of significant inflationary pressures. Still, some recent tailwinds have been visible, with investments improving and jobs growth picking pace. AUDJPY sharply rose following the latest monetary policy announcement, with the pair last seen trending around 86.010.

US Factory Orders Dip

New orders for goods made in the United States decreased less than forecast in October, while core capital goods orders came in stronger than earlier reported, suggesting continued firmness in the manufacturing sector that should further boost the economy. Figures released by the Commerce Department on Monday showed factory goods orders fell -0.10% amidst weaker demand for both defence and civilian aircrafts, following an upwardly revised 1.70% surge in September.

Economists surveyed by Reuters had anticipated factory orders declining -0.40%. Orders for core capital goods, often viewed as a leading indication of business spending, edged 0.30% higher in October versus the -0.50% fall estimated for November. The orders for these non-defence capital goods excluding aircraft had soared 2.30% in September. S&P 500 futures finished lower at 2636 on Monday as large-cap tech stocks tumbled before rebounding modestly overnight.

Chinese Services PMI at 3-Month High

A solid rise in new business orders propelled expansion in China’s services sector, helping growth accelerate to a three-month high in November. The Caixin/Markit China Services Purchasing Managers’ Index climbed to 51.9 last month from 51.2 in October to touch its highest level since August.

Today’s upbeat data broadly reflects the official measure of the non-manufacturing sector released by the National Bureau of Statistics last week that showed activity picked up in November. Apart from bolstering the view that any expected economic slowdown in the country is likely to be more gradual than was previously expected, it shows that the dire predictions of a prolonged deceleration have so far failed to materialize. After gaining ground on Monday, the USDCNH pair is stuck within a narrow range around 6.6155 in Tuesday Asian trade.