With very little economic data due out from the UK and EU for the rest of this week politics once again remain the driving force for fx markets. Of note however, UK Manufacturing and GDP figures for August will be released on Friday with the construction sector reporting an improved PMI of 56.8 from 54.6 for September, signalling further positive baby steps for the UK economy in the wake of the coronavirus pandemic.

We are now only 8 days away from the European Council Meeting which had been marked by Boris Johnson as a crucial date in Brexit negotiations prior to the UK leaving the EU. Sterling has been feeling the pressure over the past 24 hours moving away from recent consolidation versus the EUR at the 1.10 level to a low of 1.0953 during yesterdays trading. We open this morning at a rate of 1.0970 GBP/EUR.

Interesting to note however, there has been a change in sentiment amongst officials regarding the current state of play, and there now appears to be some flexibility on timescales for trade negotiations to continue. It has been suggested that EU officials are more than willing to allow trade talks to stretch through November and into December with pressure mounting on Boris Johnson to become more involved in talks if the UK wish to reach a conclusion prior to 1st January 2021.

Yesterday we saw the pound make gains, then fall and then make gains once again after rumours coming from Brussels that things remain uncertain.

Progress on social security rights for both UK and EU citizens were reported to have been all but agreed yesterday in a break through in discussions which will protect rights such as death grants and benefits for accidents at work  however, there has still been no breakthrough on the key obstacles relating to fishing rights, trade dispute resolution and guaranteeing a level playing field between the UK and the EU in trade.

The ‘level playing field’ is about ensuring fair and open competition by implementing a set of common rules and standards which prevent one country gaining a competitive advantage over other businesses operating in the same market – in essence our access to the European single market. If we fail to secure a deal and revert to World Trade Organisation terms this could be a significant blow to the UK economy especially in the wake of Covid.

Similarly, the EU will want to be able to trade with the UK given the ‘geographic proximity and economic interdependence’ in other words the fact that the UK is one of the worlds largest economies and are right next door. Which side will blink first?

Despite motivation on both sides to secure a trade agreement rhetoric around ‘no deal’ is still chiming with Mario Sefcovic addressing the EU council yesterday and concluding that “In case we reach an agreement - which is our objective – both parties will have to ensure ratification in time for an entry into force by 1st January 2021. And this will need some time. Including time for this House. If this is not the case, we will be in the “no-deal” territory. Given that we are less than 100 days away from this date, we cannot exclude this scenario.” Expectations are that Sterling exchange rates will continue to be impacted by Brexit negotiations and a bumpy Q4 could well be ahead.

US Dollar Exchange Rates Back Below 1.30 Against the Pound

Recent increases in global risk sentiment had seen GBP/USD Interbank rates climb back to the pivotal 1.30 level which remains a key area of resistance, as levels dropped back yesterday to the high 1.28’s.

As President Trump continues his recovery from Coronavirus more close officials are announced as having contracted the virus with less than 30 days before the US election, throwing further disarray in to the build up of a hotly contested election.

Whilst the US Dollar remains a significant safe-haven currency the lack of clarity in results for the upcoming election had seen some weakness filter through to the Dollar’s value over the past week.

Of note, a Joe Biden victory is seen as a negative outcome for the UK post-Brexit as Biden’s economic focus is not as tenacious as that of Trump’s. Former British Ambassador to the US Lord Darroch explains “I think Joe Biden is an anglophile, but I think that a UK-US trade deal may not be the priority that it would be if it was a second Trump term.”

This evenings release of the minutes from the most recent Federal Reserve policy meeting will be an interesting read as Fed Chairman Jerome Powell has been highlighting during speeches in the past few days that the US economy may require further stimulus. 

Powell comments that although the economy is continuing to perform well following the impact of Covid earlier this year more fiscal support is still required.  the “risks of overdoing it seem, for now to be smaller” versus offering too little support that “would lead to a weak recovery, creating unnecessary hardship for households and business”. 

As global economies continue to battle the impact of Covid-19 Politics currently take centre stage in terms of impacting exchange rates, please do keep in touch with your Account Manager at Foreign Currency Direct in order to remain informed.

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