The pound looks set to finish strongly as we go into the weekend, sitting above 1.31 against the dollar and 1.113 against the euro on interbank exchange rates. Evidently the speculated progress made in Brexit talks combined with the promise of successful COVID-19 trials and a surprising pickup in growth figures have helped for the most part draw added appetite for sterling.

Indeed, so far this week, UK Gross Domestic Product (GDP) contracted far less than expected and total business investment jumped up by 8.8% in Q3 against the expected -27.7% suggesting that perhaps business confidence across the UK may have finally turned a corner.

Interestingly, the pound’s rise was halted at key resistance points against it’s major currency counterparts with sterling struggling to find the added momentum needed to break through the pivotal 1.13 mark against the euro, a level that has not been breached since spring of this year.

Whether or not this reflects a lack of conviction from the market’s perspective remains to be seen. Perhaps not all are convinced that a UK-EU deal can be agreed in time ahead of next Thursday’s EU summit. Ireland’s foreign Minister did very little to control these concerns, stating he would not be surprised if talks unraveled if an agreement is not found in time. The Financial Conduct Authority (FCA) has also hit the headlines by confirming it is ready to intervene to stabilise market conditions should talks fall apart. Importantly, the UK was able to substantially narrow it’s non-EU trade deficit in the month of September.

It will be interesting to see if this helps fuel speculation into which course of action the UK government might take, should talks continue to lag.

On the flip side, news this morning of senior advisor Cumming’s potential departure from downing street has already started rumours of a softening approach from the PM moving forward. Evidently, much hinges on talks today and into the start of next week, therefore a volatile trading session could be expected as a result.

Long term Sterling strength in doubt over recovery concerns?

Despite closing the gap on growth levels, the UK economy continues to lag behind other rich nations, as it struggles to bounce back from the pandemic induced recession. During trading hours yesterday, official figures demonstrated the likelihood that the UK economy will contract once more before the year comes to an end. Clearly UK PLC still hasn’t been able to muster up enough momentum to recover the monumental losses seen late spring during the first lockdown, with further losses expected now that restrictions have been laid out once more.

This falls very much in line with the Bank of England’s (BoE) comments last week, suggesting another 2% contraction was to be expected in the final quarter of 2020. Then, the BoE insisted further support will be provided to help protect lending conditions as the year comes to an end, which drew further speculation around negative interest rates in the UK.

USD exchange rates: Jobs data helping the dollar to stay afloat despite another weak set of inflation figures

US Jobs data helping the dollar to stay afloat despite weak inflation figures

The fact that the US economy had rebounded at record pace at the end of October has largely been attributed to providing added support for the greenback, throughout the uncertain election period. Arguably, this was also reflected in yesterday’s trading with a meagre inflation reading doing very little to shake the dollar’s value on the international stage. The Federal Reserve’s (Fed) concern around the stalling in prices and consumer spending as a whole has been well documented, however the rollout of added stimulus seems to have helped support the economy to date. What might prove telling is how the Fed react if this trend continues into the new year.

The markets might well be holding out for a reaction before committing behind the greenback further. In the meantime, data around the jobs market along with business and consumer confidence readings could hold added weight moving forward.

It is worth remembering that the US recovery was achieved despite around 25 million Americans being made redundant throughout 2020 so far. Interestingly, initial jobless claims in November dropped to 709k from 757k indicating the jobs market is continuing to stabilise month on month, something that might prompt further support for the US dollar as the year comes to an end.

US politics update: What might cause another USD fall in the second half of November?

At the same time, Biden started the process of building his governing team despite Trump’s refusal to accept defeat. The profile of candidates selected may well provide clues into how the US will be conducting trade talks and rolling out policy moving forward. Continued speculation here could add volatility to USD exchange rates. For example, when speaking in Paris this week, German foreign minister Maas pronounced his excitement for the future, expecting relations with the US to improve considerably under Biden’s tenure.

Given a Trump victory was arguably seen as the more favourable outcome as far as the US dollar was concerned, the former President’s commitment to challenging the election results might still be providing a degree of uncertainty, which might be helping the dollar hold it’s ground on the international stage. Should his final attempts prove unsuccessful might we see USD challenge fresh lows against the euro and the pound? This morning, US election security officials have pushed back on Trump’s calls of fraud. Perhaps this trend might be engaged sooner rather than later.

Deflationary pressures to force the European Central Bank into action?

It could be an interesting end to the week for euro exchange rates with key inflation figures due from France, Spain and Germany. Earlier this week Spanish officials were pushing for further commitment from the European Central Bank (ECB) to get ahead of deflationary pressures they say are looming large over certain regions of the bloc. This morning’s releases then might hold added weight with the markets, as further contractions in prices here might force the ECB’s hand to inject more capital across the Eurozone before the end of the year, something that could affect demand for the euro too.

The euro’s value has tended to soften against its major currency counterparts, largely as a result of these pressures. Speaking yesterday, President of the ECB Christine Lagarde laid out her expectations for the Eurozone’s prospects of a recovery from this “unusual” COVID-19 recession. The parameters of which might not necessarily support long term euro strength. Lagarde hinted to an uneven, inconsistent path despite the potential rolling out of a vaccine and insisted the ECB is ready to support EU members via its extensive bond buying program.

This cautious tone doesn’t seem to have drawn much support to the euro so far, however the message from the ECB has remained consistent throughout the second half of this year, it will be interesting to see if this changes, depending on what kind of restrictions remain in place as we approach the festive period.

It's worth noting that next week EU leaders will convene at their latest summit, in which the balance of further restrictions, added stimulus and the questions around the jobs markets might come to the surface. Concerns around youth unemployment in particular has been consistently overlooked by the European Commission, despite a jump from 15% to 17% over the course of the last 2 quarters in 2020.

Unemployment across the younger generations was marked as one of the key stumbling blocks in Greece and Spain’s recovery after the 2008 crisis so it will be interesting to see if this issue is raised in the weeks to come and how the markets react as a result. It could prove pivotal in determining business and consumer confidence as we move closer to the end of the year.

If you are looking to purchase foreign currency with euros in the second half of November it may pay to reach out ahead of this event to ensure you have a clear idea of the options available to you to manage your exposure.

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