Fundamental Analysis

Dollar Drifts Lower; Pound Heads up as Barnier Sets a Deadline on Divorce Bill

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The dollar was on track to finish the week in the red against its major counterparts after three weeks of rising as uncertainties around the US tax overhaul continued weighing on the markets and disappointing readings on the Michigan Consumer sentiment also pressured the dollar. On the other hand, the pound was the biggest winner during the European session as Brexit talks did not conclude bitterly, with the EU Brexit negotiator setting a deadline for the UK to clarify its financial obligations, while upbeat industrial production and trade figures out of the UK provided further support.

Concerns over a delay in the implementation of the US corporate tax cuts gained momentum after the Senate plan submitted on Thursday differed in key areas from the House version, revealing that corporate tax cuts might not take effect until 2019. The dollar index extended its losses during the session, falling to a fresh one-week low of 94.13 in the wake of worse-than-expected preliminary data on Michigan consumer sentiment. Particularly, the index declined by 2.2 points to 97.8, below the 100.7 reading of the previous month. The index measuring consumers' expectations for future economic conditions decreased to 87.6, while forecasts were for the gauge to remain steady at 90.5.

Dollar/yen retreated by 0.19% to 113.26.

Meeting the Brexit Secretary, David Davis, in Brussels on Friday, the EU Brexit negotiator, Michel Barnier, said that Brexit talks have achieved "some progress" but still more work needed to be done for the talks to move to trade relations. Moreover, he asked Britain to clarify its financial obligations to the EU within two weeks before he considers whether "sufficient progress" has been made ahead of the EU summit in December. Earlier, the UK Prime Minister, Theresa May, unveiled her plans to set an official date and time on the UK's departure from the EU.

In economic news, the UK's industrial production expanded by 2.5% y/y in September, recording the highest rise since February, while previous marks were also revised upwards. Expectations were for a growth of 1.9%. Month-on-month, industrial output increased by 0.7%, while analysts projected the measure to post the same growth as the previous month at 0.3%. Production in the manufacturing sector also surpassed expectations, rising by 2.7% y/y and 0.7% m/m, whereas construction activities missed forecasts, with the relevant output contracting by 1.6% m/m, driving the yearly expansion down from 3.9% to 1.1%.

Regarding trade data, Britain's trade deficit narrowed to 11.25 billion pounds, while analysts expected the measure to widen by 0.45 billion to 12.80 billion pounds.

The pound exited its consolidation phase recorded during the Asian session, advancing by 0.42% on the day to a one-week high of $1.3211.

The euro jumped by 0.27% to $1.1672 on the back of a weaker dollar.

The aussie partially reversed earlier losses after the RBA cut its inflation forecasts, climbing to $0.7677. Its New Zealand cousin also pared some losses, moving up to $0.6948.

Turning to commodities, oil prices were mixed with WTI crude trading 0.10% down on the day at $57.11 per barrel and Brent edging up by an equivalent percentage to $64. Gold was flat at $1,284.95 per ounce.

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