Sterling pops on Brexit news.
Avoidance of a hard Brexit scenario could open some much-needed room above the GBP.

The GBP/USD popped into recent highs early in the overnight session and is trading just above the 1.3500 handle once again.

The Sterling caught a quick boost after an announcement from the UK that the British Parliament would be willing to stay within the EU customs union beyond 2021 in an effort to head-off a ‘hard-Brexit’ scenario. The headlines quickly took the GBP/USD up about 30 pips on reaction, and the Sterling is continuing to drift upwards.

The rest of the Thursday market window brings little of note for the GBP/USD with little on the economic calendar, and GBP traders will be left to digest the safety net of avoiding a hard Brexit as general market sentiment appears poised to continue aa mild recovery.

GBP/USD levels to watch

The Sterling’s technical outlook is still decidedly bearish, as described by FXStreet’s Valeria Bednarik: “the pair gained downward potential despite holding above its weekly low of 1.3450, as intraday recoveries stalled short of 1.3600, the previous selling level. In the 4 hours chart, the pair is developing below its 20 SMA that slowly turns south, while the Momentum indicator extended its decline to fresh 1-week low. The RSI indicator in the mentioned chart hovers around 43, following price’s action higher, but within familiar levels, far from indicating an upcoming upward move. Below 1.3450, the next relevant support comes at around 1.3410, where the pair has multiple relevant daily highs from last December.”

Support levels: 1.3450 1.3410 1.3365  

Resistance levels: 1.3520 1.3570 1.3610

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Greg Gibbs, analyst at AmpGFX explained that the EUR has been undermined in recent days by political risk in Italy.  

Key Quotes:

“The untested young leaders of anti-establishment populist parties in coalition talks to govern Italy have argued for freedoms from the rules of Eurozone monetary union. 

Italian bond yields rose 16bp on Wednesday, with some contagion to other periphery government bond markets and European bank stocks.

The EUR has lost ground against a range of other currencies and may continue to languish should Italy’s new leaders propose significant new deficit spending that appears to flout the EU Growth and Stability Pact.”

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As reported by Reuters, Mexico’s Economy Minister, Ildefsonso Guajardo, is remaining upbeat that a NAFTA resolution could be had within the next few weeks, though the US’ self-imposed deadline of this Thursday doesn’t appear set to materialize.

Key quotes

“Guajardo said it was impossible for negotiators to reach a deal before May 17, a date U.S. House Speaker Paul Ryan flagged as a deadline to give lawmakers a chance of approving it before a newly elected U.S. Congress takes over in January.

“However, I would not rule out at any point, if the participants show the willingness, that we can settle this negotiation at any moment from the close of May onwards, or in June,” the minister told Mexican radio.

President Donald Trump is committed to getting a better agreement with Canada and Mexico, White House press secretary Sarah Sanders told Fox News.

“We still want to see something happen and we’re going to continue in those conversations. They’re ongoing now and we’re pushing forward and hopeful that we can get something done soon,” said Sanders.

U.S. Representative Kevin Brady, the chairman of the tax and trade-focused House Ways and Means Committee, said there was probably little room to go past the Thursday deadline for a deal and still get a new NAFTA approved by year end.

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NZD/USD: markets fixated on yields, commodities heavy but kiwi solid.
NZD/USD: eyes on NZ budget will be watched closely.

NZD/USD has been in the recovery of the 0.6850 territories despite the dollar’s spike yesterday. NZD/USD is now consolidating the move and has been trading between 0.6880 and 0.6916 and is currently trading at 0.6899.

While the main theme stays with rising US yields that are underpinning the dollar’s correction, the higher betas are bouncing on each dip the dollar takes when US yields stabilise and tick down as investors pile into risk-free government debt – This appears to be the story for today at least.

Today’s budget will be watched closely

Analysts at ANZ explained that support levels for kiwi have held for now, and some near-term consolidation is quite possible, but it still feels like it will only be a matter of time before support is tested again with US Treasury yields continuing to push higher. “Today’s Budget will be watched closely but is unlikely to dramatically alter the currency picture.”

It’s NZ Budget day: expect an upbeat outlook for economic outlook – ANZ

NZD/USD levels

Support comes in at 0.6850 and resistance at 0.6950 and  0.7080. The NZD/USD remains below the key 200-month moving average support at 0.6980. Technicals are bearish with RSIs that are biased to the downside longer-term on the weekly sticks. Below 0.6850, 0.6780 comes as next downside target meeting the lows of mid-Nov 2017. 

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The Telegraph has said that Britain will tell Brussels it is prepared to stay in the customs union beyond 2021.

The pound is testing territories on the 1.35 handle:

Britain will tell Brussels it is prepared to stay in the customs union beyond 2021.
Ministers signed off the plans on Tuesday
The Prime Minister’s Brexit war Cabinet earlier this week agreed on a new “backstop” as a last resort to avoid a hard Irish border, having rejected earlier proposals from the European Union.
Ministers remain deadlocked over a future deal with the EU.

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Analysts at Westpac explained that the focus in Europe was the finalising of a coalition agreement in Italy between populist 5 Star and right-wing Lega. 

Key Quotes:

“Markets have begun to react to the potential fiscal blowout from the tax-cutting right and welfare spending populists with both parties being avowed Euro-sceptics. The 10 year Italian government bond yield jumped 16 basis points whereas the 10 year German bund yield fell 4bp. Moreover, EUR was the weakest G10 currency, falling from around 1.1850 to 1.1764 – a five-month low – before steadying around 1.1800. Italian equities closed -2.3%.

The US 10yr treasury yield remained elevated, rising in the NY afternoon to 3.10%, a fresh high since 2011. 2yr yields rose 2bp to 2.59% – the highest since 2008. Fed fund futures yields continued to price two more hikes this year (one in June) plus about 40% chance of another (which would be one each quarter). US data had little impact – Apr housing starts -3.7% but with Mar revised higher, Apr industrial production +0.7%.

USD/JPY probed lower in the risk-averse London morning, testing 110.05, but bounced to 110.35 in late NY as treasury yields rose.

Commodity currencies had a good session, recovering most of Tuesday’s lost ground, helped by a bounce in oil and copper prices. AUD/USD had dipped about 25pips on the soft Australian wages data but recovered to 0.7475 inside a couple of hours and continued in London and NY trade to 0.7520. NZD/USD similarly bounced off 0.6851 (a six-month low) to around 0.6900, up 0.5% on the day. AUD/NZD preserved recent gains, ranging sideways between 1.0855 and 1.0900. USD/CAD fell 0.7%.

Sterling was broadly range-bound near 1.3500. The May BoE Agents’ Report continued to signal weakness in both retail and service sector turnover and investment intentions. Although British manufacturing exports continue to be well supported and specific labour tightness was reported, the overall tone of the report was that Q1 softness was not merely weather-related and showed some persistence.”

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