Ellie Allen

Pound Beset By Brexit Uncertainty As Risk Appetite Falters

6 min read


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Over October the Pound found itself at the mercy of Brexit developments, falling over the first part of the month when it looked like negotiations with the EU had hit a wall, but then recovering again when it appeared there was fresh hope a deal would be struck. In general, Sterling managed to hold up against the majors, doing best against the Australian Dollar on the back of a slump in risk appetite. Perhaps the greatest test will come in the weeks ahead as we find out whether a Brexit deal can be reached, and what the result of the US election is.

One of the factors driving risk appetite lower was the rise in cases of Covid-19 across Europe and the UK, and the respective government reaction to this. Both France and Germany have gone into a variant of full lockdown, while the UK introduced a tiered system that operates on a regional basis. For the most part this has deterred investors from backing the Euro as fears mount about the likely economic damage of the new measures, although sentiment towards the Pound is not much better in this respect.


In the UK, business news has been focused on what will replace the coronavirus furlough scheme, which expires at the end of October. The Chancellor Rishi Sunak has announced a new – less generous – system of wage support over the coming months to replace the previous scheme. The measure is deemed increasingly necessary as the UK enters varying degrees of economic lockdown and fears grow that unemployment could hit levels not seen since the 1980s by Christmas.

With the high street and the hospitality sector under unprecedented pressure, evidence that retail sales may be slowing added further worries about the state of the UK economy in October. In addition, an underwhelming set of service PMIs were published, revealing a sharp drop in economic momentum and a possible double-dip recession.

While these economic woes may be concerning to Pound investors, the driving force behind recent movements remains the state of Brexit negotiations. The remaining stumbling blocks are fisheries and the so-called ‘level playing field’ regarding state subsidies, although optimism is growing that both can be overcome in the coming weeks. Ecostats provider Oxford Economics forecasts there is a 60 percent chance of a deal being struck, warning a no-deal scenario would likely wipe 10 percent off the value of the Pound in Q1 2021.

Due to UK domestic economic concerns, rising cases of Covid-19, and the ongoing Brexit stalemate it’s a surprise that Sterling managed to hold onto its strength over October, coming out on top of the Euro at €1.11 and holding steady against the US Dollar at $1.29.


October was a rocky month for the US Dollar, with a marked dip in mid-October followed by a rebound. The DXY Dollar index showed USD began the month at a 93 handle, before weakening and then recovering once more to finish off the month at the same rate. The fortunes of USD are closely mirroring the level of risk appetite on global markets, with increasing volatility in stocks, commodities and precious metals translating into a higher demand for the greenback.

Of course, with the US election almost upon us, many traders are avoiding big USD trades until it becomes clearer who will win the presidency. In the event that no clear winner is declared, market volatility is likely to increase still further, likely benefitting USD.

October’s main economic news story came on 29 October when the Q3 US GDP growth figures were published, revealing a forecast-beating rise of 33.1 percent, on an annualised basis. This was far better than the 31.4 percent expected – and translated to a quarter-on-quarter growth rate of 7.4 percent. President Trump will no doubt be pleased with these numbers as they represent the biggest jump in economic growth in US history. Naturally, there was a lot of ground to make up following Q2’s 31.4 percent annualised collapse, but it was enough to buoy the greenback ahead of the election.

Versus the Pound, USD fell slightly from £0.78 to £0.77 during October.


Figures released at the end of October revealed Eurozone growth had rebounded more sharply than economists were expecting, clocking up a record-breaking 12.7 percent increase in Q3. This follows a record slump of 11.8 percent in Q2, and easily beat market expectations of a 9.4 percent recovery. Despite the better-than-expected figure, the Euro remained unmoved as investors focused on what could lie ahead in Q4.

For the most part, the Euro was driven by global factors over October, and although there appeared to be a temporary rise in risk appetite – at least for a couple of weeks – this failed to translate into a boost for EUR. National governments chose to pursue stricter Covid-19 restrictions, in particular in France and Germany, which unsettled Euro investors and limited the upside potential of the single currency. Meanwhile, the on-off nature of the Brexit talks with the UK diverted positive sentiment away from the Eurozone currency. A concerning slowdown in private sector activity was revealed by the latest set of PMIs, which investors interpreted as an ominous sign for the Eurozone’s Q4 growth prospects.

Before the spectacular growth figures were unveiled, European Central Bank (ECB) head, Christine Lagarde, said that further loose monetary measures might be needed, although she neglected to indicate when this might be. Speaking at an ECB press conference, Lagarde said there was “little doubt” that policymakers would agree on a new package of monetary stimulus in December in the likely event of a double-dip Eurozone recession.

As expected, there was no adjustment to Eurozone interest rates in October (which remain at zero). Nevertheless, the Euro managed a modest appreciation against the US Dollar over the second half of October, before falling back again towards to end, leaving the EUR/USD exchange rate unchanged at $1.17.

Against the Pound, the Euro slipped in October, from £0.91 to a rate of £0.90.


It was a case of being under sustained pressure for the Australian Dollar over the past month due to increasing nervousness in Forex markets and a focus on the potential for policy action by the Reserve Bank of Australia (RBA). Economic data was mostly underwhelming, and there was scrutiny of the alleged heavy-handed way certain state and city governments were handling the Covid-19 crisis.

The latest federal budget was well-received by markets and some better-than-expected consumer confidence figures ensured that sentiment towards AUD was not all downbeat. Nevertheless, with the change in risk sentiment, the Aussie was always going to be fighting a losing battle, which eventually allowed the Pound to make substantial gains against the Antipodean currency, rising from AU$1.80 to AU$1.84.


For Forex markets, the main event likely to drive exchange rates will be the US election. Depending on whether there is a clear result or not, this will almost certainly be a key accelerant affecting the value of USD, and by extension EUR. Whether any volatility lasts for the whole month remains to be seen.

For the Pound we have the Brexit talks that are likely to be the main driver. Current negotiations are taking place in Brussels, but they could be moved to London if a deal has not been reached by mid-November. Should an agreement be reached we can expect to see a leg-up for the British currency. Of course, Sterling may still be dragged lower if risk sentiment surges due to the US election or policy action in Europe.

The Q4 GBP/EUR bank averaged forecast is €1.11, while the forecast for GBP/USD is $1.33.

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