Chief negotiators on both sides delivered optimistic summaries which helped the pound to rise, with Michel Barnier for the EU highlighting the possibility of a ‘realistic deadline’ for a deal, and UK negotiator David Frost saying a deal was ‘very much possible’.

Brexit Irish border

There have been concessions from the European side, reported in the Times today, with the EU prepared to drop demands for resolving all issues before drafting a final agreement, which has helped the improvement in sentiment.

Where we go from here is unlikely to be a smooth ride if the last 4 ½ years is anything to go by, with the pound regularly showing heightened volatility and sensitivity at crucial moments in Brexit developments. With the current transitional phase finishing at the end of the year, there is limited time before not only a deal can be agreed, but also for it to be ratified and rubber stamped by all the other EU members.

Looking forward, the coming days could prove pivotal in the shaping of this outlook, all too often we have had some positive news and sentiments underpin the pound before a sudden twist or turn causes an upset. The reverse has also been true, where very quickly negativity has been replaced by optimism, with a predictable result and a bounce in sterling. The 15th and 16th October EU Summit remains a point of interest for more concrete progress to be agreed, although holding out to purchase around or after that date offers no guarantees.

In trading yesterday against the euro, sterling began the day at 1.0965 on the interbank rate, before boldly climbing to 1.1080, a three-week high for the pound against the euro. However, the rally could not be sustained and this morning we are currently trading at 1.1020.

1% movement on the currency market is not insignificant, and this volatility with a sudden sharp rise then fall, is a good indicator of what we could be facing ahead as the market is keen to better understand some detail on exactly what the future relationship between the UK and its biggest export market will ultimately be.

Two main components likely make up these gains

What can we expect today for the pound and the currency markets? 

It will be interesting to see if the underlying optimism of yesterday can be maintained in today’s trading today for the pound. Continued negative headlines surrounding rising COVID-19 infections and backlash against the government’s stricter tighter restrictions could be one to watch as a driver of sentiment.

50 Tory MP’s are rebelling against Boris Johnson’s avoidance of parliament to introduce new curbs, after Matt Hancock the Health Secretary announced 2m people in the North East are now barred from mixing indoors and in homes.

Economic data today is limited with Bank of England (BoE) Governor Bailey speaking at 1pm the major UK release. Another reason for sterling rising yesterday was Dave Ramsden, Deputy Governor for Markets and Banking indicating the UK’s interest rate had likely reached a floor at 0.1%, and referring to negative rates said ‘we are not about to use them imminently’.

The pound has been very sensitive to discussions over negative interest rates from the Bank of England, with sterling falling after the last meeting where negative interest rates appeared to be being considered, and any comments from Bailey around this topic could prove a market mover for sterling.

In more global news German Inflation data at midday could influence the euro, before a series of speakers from the US Federal Reserve bank will take centre stage and may influence the US dollar in afternoon’s trading. The pound is 0.6 cent off three-week high interbank highs against the euro, whilst it is two cents above a two-month low against the US dollar.

Tomorrow is slightly more interesting rom the economic data front with UK Gross Domestic Product (GDP) data released at 7 am, which is the final revision of Q2 where we learned of a -20.4% figure. And the afternoon provides the latest GDP numbers for the US in Q2, which was also painful with a 31.7% drop in output.

As Daniel Wright mentioned yesterday in his report,  in more normal times such news would potentially trigger some big moves, but given the times we are living in, plus the fact the new was first released some months ago, the impact may be limited. This is essentially old and well documented news but might prove a market mover should there be any deviation on these previous numbers.

US election debates kick off - Trump Vs Biden in Ohio 

The US election is exactly 5 weeks away today and could be big news for the currency market and not just for the US dollar. As the worlds most heavily traded currency, whose flows underpin much of the global financial system, big movements on the US dollar often influence other pairings as demand rises and fall, and investors attitudes change.

Tonight, could be big news for the US dollar with the first Presidential debate taking place around 9pm US Eastern Time tonight, which is 2am tomorrow for the UK. The debate will be 90 minutes with no breaks and chaired by FOX New anchor Chris Wallace.

Such debates can sometimes prove pivotal in elections as both opponents look to discredit each other, and we potentially learn of policies which might shape future market movements. There may also be some interesting soundbites and drama, which may sway market sentiment.

Biden is still ahead in the national polls, with a summary indicating a 50.2% voting intention for Biden, versus 43.2% for Trump.  A study reported in the Financial Times suggests 60 of 91 investment professionals polled in the US believe that Joe Biden will win on November 3rd. And in terms of the effects on the currency market, the article goes onto suggest that such a result is expected to be ‘negative for US equities (stocks), and potentially also for the dollar’.

Trump’s victory in 2016 saw the US dollar rising, triggering some movements on EURUSD exchange rates, which in turn saw the pound rise against the euro. We also saw some bigger movements on Australian dollar and New Zealand dollar rates at that time too, as the currency market reacted to the news and investor sentiment turned globally.

Tonight’s debate could be where we really begin to see attention on the US election intensify, and clients looking at all manner of currency pairings should be aware of the potential volatility this might cause.

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