Michel Barnier, the EU’s chief negotiator remained in London yesterday following a series of emergency talks last week. This helped the pound in part of yesterday’s trading, but rising Coronavirus fears have once again seen the pound undoing some of those gains in trading so far today.
Against many currency pairings the pound remains range bound in a no-man’s land, trading within a familiar range as at times movements on the other paired currency sometimes form the basis of a trigger of individual moves. It appears the currency markets are keenly awaiting some substantial news on Brexit, to better understand if we will have an agreed deal or if no-deal is the path ahead for the UK in 2021.
For GBPEUR levels the last 3 months has seen just 4 ½ cents movement between the high and the low, whilst for the last month it is only just over 2 cents. The last 3 months has seen 7 cents movement between the high to low interbank rates on GBPUSD levels, with just 4 cents in the last month.
A breakout of these ranges could come at any moment and the changes could be quite sudden. We know from history that the currency markets never remain quiet for too long, and sooner or later there is a change in sentiment which forces a change in the direction of the rates. The pound has proved sensitive to Brexit news in the past and with this more final news carrying more weight, it can be argued there is added potential for volatility.
At present the sticking points of talks remain over state aid and fisheries, with both the UK and EU refusing to amend their position. The potential for volatility is high as we get closer to a more definitive crunch moment in the ongoing negotiations where Barnier will remain in the UK until tomorrow.
On GBPEUR interbank exchange rates I have seen predictions ranging from parity on a no-deal to the mid-teens based on an agreement being reached. For other pairings you can also apply varying degrees of analysis to indicate similar volatility that might potentially be expected.
Such a wide range of movement illustrates the potential volatility that we could bear witness to at any moment. For any clients with a sterling transaction to be considering for the coming months and even potentially into the New Year, now could be a good time to review any position in advance of any possible news.
Many headlines today are focusing on lower stock markets as rising Coronavirus fears spread once again. A series of grim statistics over rising case numbers in the US but also the UK and Europe formed the trigger of the moves. The American S&P 500 closed 1.9% lower and the German Dax fell 3.7%, as investors reviewed positions based on a possible worsening economic outlook.
Whilst no truly substantial pieces of economic data are released today, the economic calendar could be quite interesting with the latest ECB Bank Lending Survey released, providing a snapshot of lending in the Eurozone.
This could form part of the conversation around the Euro as the end of the week it gets a bit more interesting with the latest ECB (European Central Bank) Interest Rate decision and Monetary Policy Statement due on Thursday afternoon. Historically, ECB decisions have always proved focal points for Euro exchange rates and any clients with a Euro trade to consider might wish to be aware of this release. The focus on the single currency continues for Friday with the latest Eurozone Inflation and GDP data released, all of which with potential to influence short term volatility and provide an opportunity for buyers and sellers.
The Euro has been stronger in recent months having been boosted by the extent of the Pandemic Response Programme, a €750 bn fund which has done much to neutralise fears over how the Eurozone would recover economically from COVID-19. Rising cases numbers could however put pressure on this optimism and it will be interesting to see how all of these data sets come out, and hear what the ECB has to say on these topics too.
The US election is fast approaching, taking place one week today on November 3rd. Joe Biden remains the frontrunner with 63m Americans having already voted, driven by a surge in younger Americans casting their first-time ballots. Many analysts are correlating this with a surge in support for Democrats as this is the typical intention of the younger demographic.
The flipside to this trend is that historically Republicans tend very much to vote on the day of the election itself, and reports of a suggested democratic lead at this stage could trigger a similar surge in Republican support in some areas on the day.
Another point on these election trends are that we might not necessarily have a final result immediately on the 4th, with the Financial Times reporting some key battleground states like Wisconsin and Pennsylvania might not finish counting results for several days after the vote.
On the currency side it has generally been suggested that a democrat win is US dollar negative since the possible rise in welfare spending is less beneficial for the economy against Donald Trump’s pro-business agenda. A Donald Trump victory could be the real trigger of volatility here since it is the unexpected outcome and markets appear more prepared for a Biden win, although perhaps nothing is being taken too much for granted given poor previous records on predictions in US elections.
All in all this election is shaping up to be a key market event as usual, and with a week to go clients interested in not just the US dollar, but also other pairings connected to it, may wish to ensure they have highlighted any potential trades to us so that we can keep them informed of developments.
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