The pound appears to have consolidated the recent gains it has made against many major currency pairs, despite a negative day for the currency yesterday.
The recent strengthening of the pound has been prompted by impressive Retail Sales figures out of the UK, demonstrating the resilience of the sector despite lockdown measures. This is a key area for the UK owing to the importance of the services sector within the country’s economy, as it covers around 80% of the UK’s economic output. Another reason for improving sentiment surrounding the UK pertains to the surprising recovery in the UK property market. According to Nationwide, house prices grew at the fastest rate in 16-years owing to the bounce back of property prices across the country, after the falls during the height of lockdown. Nationwide also reported that prices are now at the highest levels on record and there have also been a spike in mortgage approvals, although there are some concerns regarding mortgage approvals for first time buyers.
A potential downside for the pound could be the ongoing Brexit negotiations which have so far failed to result in a breakthrough. The EU’s chief negotiator, Michel Barnier recently came out and announced that he is ‘disappointed’ with the progress so far and doesn’t think it deal is likely. Both UK and EU negotiators have outlined plans for a deal to be struck by October. This would then allow EU lawmakers to draw up the new legislation by the new year but German Chancellor, Angela Merkel recently commented that she thinks the talks could continue up until the end of the year.
The Bank of England’s Michael Saunders will also be giving a speech and after the recent comments from the BoE regarding them having more tools in their arsenal regarding financial stimulus packages, his comments could be watched closely by financial markets.
This week the euro has continued to lose value against the pound as strong economic data from the UK and worse than expected data out of the EU caused an upward trend for GBPEUR rates. The pound to euro exchange rate is also continuing to trade close to its 10-week high, despite a slight sell-off of the pound’s value yesterday.
Some of the current movement for the euro could be based off of the economic difficulty being felt by some of the 27 member states of the EU, which were struggling financially even before 2020 came around, and are now really being put under the hammer as the pandemic continues to grip many economies globally with ensuing recessions still very much underway. Initial considerations that the euro had responded with firm resilience against many of its major currency counterparts is starting to disintegrate as the pound, which has not been a particularly favourable currency during this pandemic, is starting to shape up as a safer bet than the euro.
For those of our readers following the GBP to EUR pair, there could potentially be further market movement in the coming months as rumours swirl that the European Central Bank (ECB) is concerned that the euro has become overvalued. Recently, analysts at HSBC outlined their prediction that the ECB will be increasingly uncomfortable with the high value of the euro (especially concerning EURUSD) and may look to reign in the currency's value. If this occurs it could spill over into the GBPEUR pairing and therefore help the pound climb higher against the euro. The euro’s trade weighted value against a basket of major currency pairs is at the highest level since 2014 to put things into perspective.
Cable, which is the name given to GBPUSD currency pairing, remains close to its 9-month high, despite the slight sell-off of the pound’s value yesterday. Earlier in the week, GBPUSD exchange rates were trading on mid-market at 1.337, a staggering 27-month high. With the US struggling on many different fronts, not least COVID-19, there could be further opportunities for clients looking to buy into the US dollar.
Moving into the political sphere, just like the UK’s Brexit drama, the US have their Presidential election on 3rd November which is beginning to gain as a significant market mover as we edge nearer to the date, and also in terms of trading of blows from the current President Trump and front runner Biden as the campaign heats up.
With Joe Biden still holding a firm single digit lead over Trump, uncertainty creeps into the market as the Republican versus Democratic viewpoints will have their differing effects on the US economy and therefore makes for unsettling trading environments. This usually has the result in currency weakness and could see the EURUSD creep above 1.20 as it now just needs a little push to get it over the line.
Amongst calling Trump a “weak” leader, in their latest session of insults, Biden goes on to say that “fires are burning and we have a president who fans the flames". It follows not only the massive issues the US faces in terms of the pandemic which on Saturday had now surpassed 6 million cases, it also goes deeper into the social divisions created from the Black Lives Matter campaign earlier this year amidst the most recent event of African-American citizen Jacob Blake being shot last month.
With multiple problems still being looked over on top of the fact that it is the worst virus-hit country globally, uncertainty is rife within the largest economy and we may see further currency inroads to the US dollar before certainty and strength return to its markets.
Today could be a busy day for exchange rate fluctuations as it’s the first Friday of the month, and this means that Non-Farm Payrolls will be released just after lunchtime, along with the US Unemployment rate. Non-Farm payrolls cover the amount of new jobs created within the US on a monthly basis, with the exception of the agricultural sector. 1,400,000 new jobs are expected to have been created during August, so we can expect to see any deviations from this figure potentially result in market movement.
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