GBP - Will Hope for BoE Overshadow Brexit?

There was very little movement in currencies on Monday and this lack of volatility could be indicative of trading for the rest of the week. With no major U.S. economic reports scheduled for release and Fed Chair Janet Yellen not speaking again until after the market closes on Friday, political headlines are the only hope for volatility in the greenback.  Traders should be watching for any news on the selection of a Fed chair, North Korea and progress or setbacks on tax reform.  Yellen, who has a 90% chance of losing her job in February spoke on Sunday and her comments were relatively hawkish. She said employment should bounce back after weak September and her best guess is that soft inflation readings won't persist. Most importantly, she felt ongoing economic strength warranted gradual rate hikes, which suggests they are on track to raise interest rates one more time this year.  These positive comments along with the stronger than expected Empire State manufacturing survey helped USD/JPY avoid further losses as manufacturing activity in the NY region grew at its strongest pace in more than 3 years. However looking ahead we believe USD/JPY is vulnerable to additional losses as U.S. and South Korea military exercises begin.  CNN also reported that North Korea is rejecting diplomacy with the U.S. for now. The Fed chair announcement is also expected any day now and any surprises could send USD/JPY below 111.00.

While this may be a quiet week for some currencies, it should be an active one for the British pound.  Unlike the U.S. dollar, we got a taste of the big potential intraday swings today with GBP/USD crashing on the back of Brexit news. Early in the North American session, there were reports that unless the European Union concedes on some key issues, Brexit talks could collapse. According to officials close to the matter, Bloomberg reports that "without a clear sign that negotiations will progress to trade and transition arrangements by December at this week's summit of EU leaders, the entire Brexit process will be in danger of collapse."  Last week investors were hopeful that the talks would make meaningful progress after the EU's Chief Negotiator said that they could provide the 2-year Brexit transition period but the latest setback is a sign of how difficult the negotiations will be.  As the talks progress however, the outlook for the economy and monetary policy could overshadow Brexit risks. Consumer prices are due for release tomorrow and according to the PMIs, price pressures accelerated in the month of September, convincing the Bank of England that a rate hike would be necessary.  Labor and consumer spending numbers are also due for release this week along with a speech by BoE Governor Carney and we believe that most of these event risks will be positive for sterling.

Euro on the other hand traded in a narrow 25 pip range throughout the North America session. German wholesale prices and the trade balance were both better than expected. Geopolitical risks will also affect the euro this week as we watch the ongoing political crisis in Spain. The Spanish Prime Minister has given the Catalan government 8 days to drop their independence bid with a failure to do so resulting in a suspension of their autonomy. In his latest speech today Catalan leader Puigdemont failed to address the issue directly, choosing to appeal to the government by calling for a negotiation over the next 2 months.  If Madrid refuses to talk, then Thursday is D-day and it'll be interesting to see how both sides respond.  Meanwhile the German ZEW survey is scheduled for release tomorrow and these political troubles could weigh on investor sentiment.   ECB President Mario Draghi's speech on Wednesday will be one of the most important event risks for the euro this week.

All 3 of the commodity currencies traded lower with the New Zealand dollar turning negative after earlier gains. Service sector activity in New Zealand slowed in the month of September and if tonight's CPI report also surprises to the downside, reinforcing the Reserve Bank's caution, NZD/USD could slip back down to 71 cents.   The Canadian dollar shrugged off higher oil prices to move above 1.25 on the back of a stronger U.S. dollar and falling Canadian yields. The Australian dollar is trading lower ahead of tonight'sRBA minutes. We're not expecting much from the RBA as AUD dropped when the RBA said a higher A$ is weighing on the outlook for output and employment and warned that growth and inflation may be slower than forecast if the currency keeps rising.  However it recovered its losses quickly on their positive outlook for the labor market. The bottom line is that the RBA is comfortable with the current level of policy and has no immediate plans to raise interest rates.