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Come on Arlene?

It was a rather more subdued day for stock markets yesterday with European markets finishing the day mixed, and US markets finishing little changed.

A disappointing September US retail sales report, along with a Fed Beige Book survey appeared to have little impact on investor sentiment, though it could shift the thinking on whether the Fed decides a further rate cut is needed.

The Beige book survey, which covers the 12 Fed regions did show that the US economy was expanding at a modest pace, even though trade tensions were weighing on the economy, with businesses becoming increasingly more sceptical about the outlook. This survey will be a key arbiter for Fed officials when they meet to decide whether to cut rates further at the end of the month.

The German DAX and euro also continued to edge higher on the back of further progress in Brexit talks in Brussels. While it is widely acknowledged that a no deal Brexit would be damaging to the UK economy, it wouldn’t be a picnic for the EU either, particularly given how weak the European economy is at the moment. A deal would be a welcome tonic on both sides of the Channel.

The pound also continued its advance yesterday as hopes continue to rise that the EU and UK governments can put together a deal that can satisfy not only the dissenters to the previous deal, in the form of the Democratic Unionist Party, as well as the more Eurosceptic wing of the Conservative party, but all other parties as well.

Optimism is rising that this time will be different and the concerns with the Irish backstop can be resolved to everyone’s satisfaction, with talks set to continue further between the DUP, led by Arlene Foster, and the government as concerns about consent and customs arrangements are addressed. 

This is where progress could get a little tricky as it does rather call into question as to whether any deal can rely on the support of the rest of the UK parliament, which has been a consistent road block to any sort of consensus in the past two years. It is no secret that while there has always been a hard-core cabal of Eurosceptic MPs it is also true that there is also a significant cabal of MPs who are opposed to any sort of Brexit.

Let’s not forget that the last deal was voted down on three occasions, while other indicative votes also didn’t bring forward any other positions that generated a consensus either.

The problem now is that MPs having complained bitterly about the prospect of a no-deal Brexit could find themselves voting down a deal that they themselves went to court to force the government into delivering. If they were to do this having complained about being cut out of the process in the first place, they would be merely confirming to UK voters that they, far from looking to draw a line under this stage of the Brexit process, were merely intent on preventing it altogether.

They certainly might take a dim view of opposing MPs who choose to oppose the deal for the sake of it, or on the basis that they didn’t negotiate it. With an election in the offing at some point in the next few months the voter’s verdict could well be brutal.

On the data front it’s been a little bit of a mixed week for UK data with unemployment edging a little bit higher in the three months to August to 3.9%, though on the plus side wages held up well while headline inflation slipped back to 1.7%, maintaining a healthy gap in real terms wage increases.

The UK consumer has been a little bit more restrained in recent months, when it comes to spending money given the uncertain political environment. After a strong end to Q2 consumer spending has flat lined, a decline of 0.2% last month, offsetting a 0.2% rise in July. Expectations for this month are for another decline of 0.2%, which would single a disappointing end to Q3. A recent survey from the British Retail Consortium pointed to a big decline last month, however that survey is heavily skewed to the high street, and less to on-line purchases. Nonetheless the warmer September weather does appear to have deferred some spending on purchases of autumnal clothing, so this could also show up in this morning’s numbers as well.

EURUSD – finally appears to be breaking higher, pushing above the 50-day MA, which could see us move towards the 1.1200 area, on a break above the 1.1110 area. Intraday trend line support from the lows this month comes in at the 1.1015 area, and below that at the 1.0920 area.

GBPUSD – the pound continued its advance yesterday pushing through the 1.2850 area, which is the 61.8% retracement of the 1.3380 to 1.1955 down move. This surge brings with it the prospect of a move towards the 1.3000 area, having also broken a key down trend line. Support lies back near the 1.2670 area, and 1.2500.

EURGBP – pushed briefly below the 0.8600 area, where we found some support. This could well contain the downside in the short term, however the lows this year at 0.8415 remain a realistic prospect. Pullbacks need to stay below the 0.8715/20 area for further losses to unfold. 

USDJPY – having currently pushed above the 108.70 level, we look to be headed towards the 109.30 area, where we have the 200-day MA. Support comes in at the 107.50 area, as well as the lows this month at 106.50.

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