Euro hit a 1-month high against the US dollar today on the back of stronger Eurozone data, weaker US data and Brexit optimism. The single currency had been trending higher for most of this week with a large part of its strength driven by the prospect of Brexit deal that would reduce uncertainty and remove a major risk for not only the UK but all members of the Eurozone. A deal is close with German Chancellor Merkel saying “we are in the last meters of the negotiation” and French President Macron adding that a “Brexit agreement is being finalized.” An agreement should be announced in the next 24 to 48 hours and when that happens we expect all of the major currencies to rally including the euro. The September high of 1.1109 would be the target but the rally could extend as high as 1.1150 if the market finds the deal favorable. While Eurozone data is still expected to worsen, in the very near term Brexit optimism and the prospect of a Fed rate cut later this month will be main drivers of EUR/USD flows.

The same is true for sterling. GBP/USD traded higher for the fourth time in five trading days despite weaker inflation data. The pair reached its strongest level since May 2019 on the prospect of an imminent agreement. An agreement wasn’t reached today but investors expect EU leaders to piece together a deal by Thursday or Friday. The latest consumer price report shows that inflationary pressures in the UK have been relatively contained. On a monthly basis, CPI growth eased to 0.1% from 0.4% and year over year, prices stayed at 1.7%. Retail sales are scheduled for release tomorrow and while we are looking for a further drop in spending, investors will continue to shrug the data off in favor of positive Brexit headlines.

Meanwhile, the US dollar traded lower against all of the major currencies on the back of an atrocious retail sales report. Consumer spending dropped for the first time in 7 months by the largest amount since February. Excluding autos, the decline wasn’t as sharp but retail sales was still negative. Expectations for a rate cut shot higher in response with Fed fund futures now pricing in 86% chance of easing this month, up from 72% yesterday. Spending is the backbone of the economy and the latest report gives the doves their strongest reason to back a third rate cut this year. According to the Fed’s Beige Book, businesses see expansion but many have cut their outlook. With that said, they report that the economy expanded at a slight to modest pace with a tight labor market and rising wages. Fed Presidents Kaplan and Evans spoke today and the former seems more skeptical of a rate cut than the latter although Evans also feels that the economic data seems pretty good and the economy is navigating risks pretty well. Although EUR, GBP, and other major currencies outperformed the greenback today, the losses in USD/JPY were limited despite weak data. Looking at the charts, USD/JPY is due for a correction especially as we get closer to the October Fed meeting. Tomorrow’s housing starts and building permits are not expected to have much impact on the greenback but the Philadelphia Fed index could ignite some movements.

The New Zealand dollar was the only currency to underperform the greenback. Even though CPI growth accelerated in the third quarter, the year over year rate slowed to 1.5% from 1.7%. The market is looking for one more rate cut from the Reserve Bank of New Zealand this year and NZD is weakening because the data reinforces their expectations. In contrast, investors do not expect the Bank of Canada to ease this year, which explains why the currency completely shrugged off their softer inflation report. CPI fell -0.4% in September with the year over year rate holding steady at 1.9% instead of accelerating to 2.1% like economists anticipated. The Australian dollar is in focus tonight with labor market numbers scheduled for release. The RBA pulled the trigger on easing earlier this month and think tonight’s report will justify their decision. AUD/USD remains under pressures with 68 and 67 cents the key levels to watch.