The GBP/USD levels had a more product day of trading yesterday as the mid-market rate gained almost a cent over the course of the day moving into the mid 1.32’s.
Last week was more interesting for euro-investors as Wednesday brought interbank exchanges rates up to 1.1280 which are levels not seen since mid-May this year. Some of this positivity was off the back of the news that the US company Pfizer had developed a vaccine that had a 90% success rate in preventing the contraction of COVID-19, albeit on a small conduct survey. The UK has bought 40 million doses of this to be hopefully distributed across the most vulnerable and health care workers to be implemented in the coming weeks which brings some well needed (and deserved) confidence back to the markets. It does seem surprising then that when another US company called Moderna more recently came out with another successful version of the vaccine to which the UK bought up enough doses to vaccinate 2.5 million more UK citizens, the pound did not get another surge in strength.
However, any potential market movement may be forestalled by what is to come with Brexit. The deadline goalposts, as many are aware, have been regularly pushed back over the course of the 4 political-heavy years with the current suggestions being early next week that a deal could come to fruition. This comes hand in hand with 2 hard-line Brexiteers Cain and Cummings having left No 10 amidst “internal battles” and competition for their jobs. Ultimately, it could be the case that even despite how close we are to the end of the year, where the UK categorically has to compromise with the EU on several previous stumbling blocks, there could be light at the end of the tunnel to get a trade deal in place.
Another side to the coin that has not had its fair influence on sterling’s value is the UK’s GDP outlook. Earlier this month, the UK experienced one of largest increases to it’s Q3 GDP at over a 15% increase which lead many to suspect that current events were much rosier than they seem. What is worth noting is that the economy overall is still 8% lower than the same time last year with the possibility of unemployment more than doubling and close to tripling up to 10% according to the World Bank. Consequently, should a Brexit deal in the coming days and weeks be achieved, even this long-term economic confidence could still become very fragile amidst a weak financial forecast moving in to 2021.
The UK’s European counterparts are also having issues within their own political sphere. The proposed EU budget which includes the €750bn COVID-19 recovery fund has been vetoed by Poland and Hungary due to the binding clause that ties the two member states to the rule of law within the bloc. As a result, the EU ambassadors were unable to endorse the budget and thus has created tension within the group. Alongside this, an investigation is now underway regarding the two countries undermining of the democratic standards and could cost them billions in EU funding. Similar issues were brought about earlier this year when the EU treasury were deciding where to spend the recovery funds as many countries had varying effects stemming from the coronavirus and the ensuing national lockdowns.
Even Germany, the economic heart of the EU, is expected next week to see its GDP Q3 prediction at a rough 10% contraction. This has significant ramifications for the Euro as a substantial amount of the recovery fund is made up by grants from the wealthier EU countries such as France and Germany. If said countries cannot afford to spare funds for other EU states, it may put really strain on certain economies to survive through this second wave of COVID-19 where it has not been uncommon for more populated countries within Europe to see more than 20k+ cases a day.
From an economic standpoint, Christine Lagarde is holding speeches throughout the week giving an insight into the financial health of the bloc and what could be in store from a monetary policy stance. The nature of the release could have a direct influence on the euro’s value but it seems like the market is currently more interested in the result of the upcoming Brexit decision so the effects of these releases may be subdued.
Elsewhere, German markit manufacturing data next week is expected to fall from 58 to 55 whilst the eurozone overall should see the same report fall less rapidly from 50 to 49. Whilst a release of less than 50 is considered negative and could weaken the Euro, they are relatively minor changes and may not amount to much. This will come as welcomed news as the EUR/USD has gained between 0.5-1 cent over the course of the last 7 days up to a mid-market reaching close to the 1.19 levels.
The USD which, earlier this year, had enjoyed a healthy amount of growth against some of the riskier currency such as sterling may be coming to an end with potentially more comfortable market confidence returning off the back of the vaccine initiations. The currency pairing, where in mid-March had started its journey to gain 10% against sterling, may already be starting to weaken as it edges closes to the 1.33 levels seen last week. It results from the fact that the US dollar is a safe haven currency and in times of financial turmoil turn to it as the volatility it experiences towards events such as pandemics and recessions is generally considered more limited.
With 2 key US companies providing potential vaccines as mentioned earlier in the report, there are a multitude of ways to spin what its effect could be for USD strength. On one hand, you have a reduced risk sentiment and so people could start to sell off the dollar as the perceived period of uncertainty is coming to a close which would weaken the US dollar. On the other hand, two companies who are producing vaccines doses en masse to many countries globally in high demand could have the ability to reinforce some economic stability to the world’s largest superpower which could bring solidarity and strength to the US dollar.
This would come at a time when the US economy needed it as US retail sales figures came in lower than expected yesterday at 0.1% from a previous 0.5%, US durable goods orders expected to drop next week from 1.9% to 0.3% and nondefense capital goods orders estimated to halve from 1% to 0.5%.
Having said this, despite GDP in Q2 at a shocking record low of -31.4%, Q3 has predicted a complete rebound to 33% when it is revised next week. Just like what is witnessed in the UK, the bounce back will be felt in the US but could become a double dip recession if coronavirus continue to grip the nation with increasing cases. The newly elected democratic president Joe Biden may also have differing opinions to lockdown restrictions than his republican counterpart and predecessor Donald Trump so we could see a change in economic outlook as we get closer to the end of the year.
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