Asia AM Digest: Pound Soars as Brexit Deal Prospects Brighten

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The British Pound led the way higher yesterday, buoyed by reports of an imminent post-Brexit Irish border deal. The thorny issue of how the dividing line between Northern Ireland and the Republic of Ireland will work after the UK leaves the EU sank an almost-there accord earlier this week.

The US Dollar continued to push higher amid reports that President Donald Trump will unveil an infrastructure spending plan in early January. That might amplify upward pressure on inflation from a tax cut effort now making its way through Congress, leading to a steeper Fed rate hike cycle.

Rates-sensitive currencies at both ends of the yield spectrum – the Australian and New Zealand Dollars at the top and the Yen at the bottom – were sent dutifully lower by the prospect of higher US borrowing costs. A broad improvement in sentiment compounded pressure on the perennially anti-risk Japanese unit.

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IG Client Sentiment Index Chart of the Day: EUR/USD

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Retail trader data shows 41.7% of traders are net-long EUR/USD, with the ratio of traders short to long at 1.4 to 1. The number of traders net-long is 0.3% higher than yesterday and 7.6% higher from last week, while the number of traders net-short is 3.4% lower than yesterday and 3.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse lower despite the fact traders remain net-short.

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1. Yen Looks Past Local Data to US News, USD/JPY Chart Warns of Top by David Cottle, Analyst
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3. Near-term Setups in GBP/USD, NZD/JPY, and AUDJPY by Michael Boutros, Currency Strategist
4. Becoming a Better Trader: 3 Principles of Price Action Analysis by Paul Robinson, Market Analyst
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