Sterling moved sharply higher after positive rhetoric from Irish Prime Minister Varadkar that a Brexit deal was still possible.

Risk appetite strengthened during Thursday with positive rhetoric surrounding US-China trade talks and hopes for at least a limited deal on Friday.

Equity markets made significant headway while bond yields moved higher. Markets continued to price in a further Fed rate cut this month after the US CPI data.

Defensive dollar demand declined with the index at 2-week lows while EUR/USD moved above 1.1000 as yield spreads narrowed and commodity currencies advanced.

Sterling moved sharply higher after positive rhetoric from Irish Prime Minister Varadkar that a Brexit deal was still possible following a positive meeting with UK Prime Minister Johnson.

Oil prices were boosted by stronger risk appetite and reports of a missile attack on an Iranian tanker. Precious metals lost ground amid a dip in defensive demand, although selling was limited.

US consumer prices were unchanged for September compared with consensus forecasts of a 0.1% increase with the year-on-year rate holding at 1.7% compared with expectations of 1.8%. The core increase was slightly below expectations at 0.1%, although the annual rate held at 2.4% and equalling 10-year highs. Initial jobless claims declined to 210,000 from 220,000 previously. There was little change in futures markets with the chances of an October rate cut still seen around 80%.

UK GDP declined 0.1% for August compared with consensus forecasts of no change, although quarterly data was solid. August industrial output dipped 1.8% for the year, although construction output beat expectations. Bank of England Governor Carney stated that recent data is consistent with soft underlying growth. Reaction was limited with Sterling in tight ranges.

After their bilateral meeting, Prime Minister Johnson and Irish Premier Varadkar stated that there was a pathway to a possible Brexit deal and GBP/USD spiked higher to the 1.2280 area. Irish sources also stated that good progress had been made on three issues and that Brexit negotiations will resume.

In response, Sterling extended gains, even though Varadkar also stated that there were issues surrounding customs and consent. UK gilt yields recorded the largest one-day gain since the end of 2015. GBP/EUR rallied sharply to highs near 1.1300 while GBP/USD strengthened to 2-week highs above 1.2450 with the sharpest overall UK gain for seven months.

Markets will monitor rhetoric from EU Chief Negotiator Barnier closely on Friday with position adjustment also key as GBP/USD traded just above 1.2450 in early Europe.

Economic Calendar

07:00Germany CPI (M/M)(SEP)0.00%-0.20%
07:00Germany CPI (Y/Y)(SEP)1.20%1.20%
07:00Germany Harmonised CPI (M/M)(SEP)-0.10%-0.10%
07:00Germany Harmonised CPI (Y/Y)(SEP)0.90%0.90%
11:30ECB Luis De Guindos Speaks--
13:00FOMC Member Kashkari Speaks--
13:30USD Export Price Index (M/M)(SEP)-0.2-0.6
13:30USD Import Price Index (M/M)(SEP)-0.40%-0.50%
13:30CAD Employment Change (M/M)(SEP)15.0K81.1K
13:30CAD Full Employment Change(SEP)-23.8K
13:30CAD Unemployment Rate (M/M)(SEP)5.70%5.70%
15:00USD Michigan Consumer Sentiment(OCT 01)--
18:00USD Baker Hughes US Oil Count-710
18:15FOMC Member Rosengren Speaks--
20:00FOMC Robert Kaplan Speech--

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.