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Posted by portugalpress on September 28, 2018

After a tough week last week, the pound did manage to strengthen by the Friday, hinting at the resilience it would show this week. Britain's opposition Labour party was preparing to give its support to a referendum on whatever deal the government eventually cobbles together. Investors appeared to believe common sense still militates against a no-deal Brexit: on Monday the government published another of its occasional papers about the perils of the cliff edge. The Brexit downside for sterling is still that, post-Salzburg and towards the end of this week, the UK government has no withdrawal plan that Brussels can accept. Bruno Le Maire, France's finance minister, drove home that point when he said that Britain must not be better off outside the EU than in it.

The euro received a boost from European Central Bank president Mario Draghi, who was uncharacteristically bullish about the Euroland economy. Addressing the European Parliament Sig. Draghi spoke of "a relatively vigorous" acceleration of inflation in the euro zone. Given the percentage-point gap between headline inflation at 2.1% and core inflation at 1.1%, it is unlikely that he was hinting at any early increase in euro interest rates. However, Peter Praet, the European Central Bank's chief economist, poured cold water on the notion that the ECB president had conveyed any new and meaningful message with his observation the previous day. The euro took a step back.Mr Praet said it was right that the euro had subsided after investors had had time to absorb Sig. Draghi's comment on Monday because "I don’t think there was anything new in his communication". In terms of ecostats, German wholesale prices went up by 0.3% in August and the French business climate was a little softer, down three points to 107. The major concern for the euro is the Italian budget, the main worry being that the deficit could widen beyond permitted EU levels.

In the US, the target for the federal funds rate went up by 25 basis points to 2% - 2.25% and the bit about keeping policy "accommodative" (relaxed) was no longer there. In the accompanying economic projections, the "dot plot" of FOMC members' expectations pointed to three further increases in 2018 and two more the following year. Fed chairman Jay Powell asked investors not to read too much into the change of language. He did concede that there "is a risk" of trade wars stoking inflation but saw no immediate threat. The reaction was just as expected. The dollar went nowhere and the US president, who is "basically… a low-interest-rate person" said of the tightening move "I am not happy about that".

The signing of a trade deal with Mexico that excluded Canada did more to hinder the Loonie than help the Greenback.

It was not so much the existence of a US deal with Mexico that hurt the Canadian dollar this week as the accompanying commentary. The timing is linked to the Mexican president's wish to sign the agreement before he leaves office. But Trump said of Canada "we don't like their representative very much" and told journalists that he had refused to meet with premier Justin Trudeau. The escalation of bad feeling between Washington and Ottawa led investors to mark down the Canadian dollar.

There was little news from Down Under; fears about the impact of the US/China trade war are starting to subside which helped a little. New Zealand's economy expanded by just as much as the States in the second quarter and data released overnight showed a welcome rebound in business confidence. The Kiwi reacted positively to the confidence figures, though investors see little chance of the RBNZ taking rates higher. The most they can hope for is a less pessimistic growth outlook in the central bank's statement.

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