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    European Session – Euro rallies above 1.12 , dollar weighed as US trade deficit widens

    The euro stabilized just above the key 1.1200 level, reaching as high as 1.1238 despite disappointing German factory orders that fell 1.8% month-on-month in August versus a gain of 0.5% expected. Meanwhile the prior reading was revised from -1.4% to -2.2%. Despite the deterioration in the data, the euro rose due to the broader risk appetite in the markets. But gains versus the dollar in the long term are expected to be limited due to the diverging monetary policies between the ECB and the Fed.

    Sterling rose to test the key 1.5200 level. The market shrugged off the Halifax house price report that showed easing UK house prices which fell by 0.9% between August and September. Risk for the pound will come from Thursday’s Bank of England meeting. The minutes released after the meeting will be closely watched. The last publication of the MPC vote count was 8-1 to hold a rate hike.

    Data from the US showed the nation’s trade deficit widened more-than-expected in August, surging by 15.6% to $48.3 billion, due to sagging US exports and rising imports from China.

    The dollar traded up close to the 120.50 level but mostly based on yen weakness ahead of the Bank of Japan policy statement on Wednesday. While no changes are expected to monetary policy, the risk lies in the tone of the statement. There are expectations for the Bank to move in its October 30 meeting to increase stimulus measures.

    The Australian dollar rose to a two-week high of 0.7137, supported by a lack of action by the Reserve Bank of Australia today. The RBA held the cash rate at 2.0%. Meanwhile rising commodity prices also helped buoy the aussie.

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