FX round-up: Pound bounces, Turkish lira and Russian rouble in focus

The pound bounced back at the start of the week even after - in what observers said was a challenge to the Prime Minister - Tory rebels published their alternative to her Brexit plan and despite a weak reading on a widely-followed survey of factory sector conditions.

It was published just ahead of a Cabinet meeting scheduled for later on Monday at which ministers were expected to run over a range of options on immigration after Brexit, including a proposal to give preference to those countries with whom Britain had a free trade deal in place.

Earlier, the Confederation of British Industry's total orders index for manufacturing had fallen from a reading of +7.0 in August to -1.0 for September (consensus: +4.0).

The decline, albeit from a high level, showed that the boost from the recent drop in Sterling was fading, Pantheon Macroeconomics´s Samuel Tombs said.

Against that backdrop, as of 2111 BST the pound was trading 0.31% higher at 1.31175, but off the highs of 1.3167 reached during the session.

On Friday, the pound had suffered its sharpest single-day fall year-to-date after the EU council president, Donald Tusk, rejected Theresa May's Chequers plan.

Europe's single currency was also stronger against the Greenback throughout most of the session, although an earlier jump to 1.1816 had been erased, leaving it trading essentially flat at 1.17489.

Boosting the euro, in remarks to the European parliament, European Central Bank chief, Mario Draghi, forecast a "relatively vigorous pick-up" in core consumer prices in the Eurozone over the medium-term.

Also weighing on the US dollar on Monday, JP Morgan strategist Mislav Matejka told clients he believed the "bulk of the year-to-date bounce in the US dollar now lay behind us".

On a related note, data from the US Commodity Futures Trading Commission, that had been published on Friday, had revealed that so-called 'long' positions in euro/dollar had fallen to just 1,666 contracts last week, which was down from 11,170 during the previous week and just above the 52-week low of -7,219.

Matejka also sounded a positive note on emerging market FX, telling clients: "Also, USD holds the key for the EM-DM trade. We were cautious on EM entering 2018, mainly due to fears of a USD rally and China activity slowing, but upgraded the region in the summer. Signs that DXY is not making new highs, nor that CNY is making new lows, are welcome.

"We see encouraging news on the China growth front – monetary conditions index is bouncing. Chinese house prices are accelerating again, as is the new floor space started – in stark contrast to the 2015 experience."

Indeed, the biggest moves in foreign exchange markets on Monday were in the EM space.

Turkey's lira was especially well bid, with the US dollar slipping 2.0% to 6.1652 after US Secretary of State, Mike Pompeo, reportedly said that pastor Andrew Brunson might be released over the next month.

The Russian rouble was also stronger, gaining 0.94% versus the dollar to 65.8328.

In remarks to WebFG, SOVA Capital's Daria Isakova predicted that the Russian central bank's next move, after surprising most analysts with an interest rate hike on 14 September, would in fact be to cut.

The risk of further sanctions did exist, and had increased the country risk premium, as did favourable tailwinds, including CBR's decision to stop its purchases of hard currency for Russia's National Wealth Fund for the time being and higher crude oil prices, Isakova said.

She also expected the risk of fresh sanctions to "gradually moderate" following the US mid-term elections on 6 November.

That, she explained, would help the rouble to narrow the gaps which had opened-up vis-a-vis its emerging markets peers as well as against other oil exporters.

Her year-end 2019 forecast for the US dollar-Russian rouble was 62.0 to 63.0.