Throughout November the Pound generally strengthened on currency markets on the back of a trio of factors. These consisted of rising global risk appetite in the wake of the US election, a number of breakthroughs in the race to find a vaccine for Covid-19, and rising expectations that a Brexit deal would be agreed upon before the transition period runs out. The Pound was swept up in a move away from the US Dollar, which has now experienced three quarters of weakening and is approaching a two-year low, and benefitted in particular from the Oxford University/AstraZeneca vaccine breakthrough.
Despite this positive movement for the Pound, a number of less welcome developments limited its upward potential towards the end of the month, even causing a reversal against the Euro. As we have come to expect, it was a dip in Brexit sentiment that had the greatest limiting effect on the Pound, as observers fretted that without a top-level meeting between Boris Johnson and a number of other EU heads of state over the issue of fishing rights, the danger of a ‘no deal’ scenario was looking increasingly likely. As the Brexit transition period runs out at the end of this month, and with no extension on the cards, time is running short for any such agreement to occur. At the same time, some unwelcome economic news came from the Office for Budget Responsibility (OBR), which stated that the UK economy was due to shrink by 11.3 percent this year.
Markets sought to find something that would give reason to support the Pound in November, but other than the occasional positive Brexit snippet there was little in the way of good news on the economic front. Towards the end of the month it was announced that Sir Philip Green’s Arcadia retail empire was on the verge of bankruptcy. With the High Street chain including famous brands such as Burton, Dorothy Perkins and Laura Ashley, some 13,000 jobs would be at risk if it goes under. The chain had got into difficulty following the Covid-19 related shutdowns of non-essential businesses, with a pickup in online shopping failing to make up the difference in lost sales. The job losses will add to the predicted 2.6 million people unemployed by mid-2021 which the Resolution Foundation forecasts.
On the other hand, news that Oxford University and British-Swedish pharmaceutical firm AstraZeneca had proved to be highly effective in advance trials gave the Pound a much-needed boost. Although another vaccine, made by American firm Pfizer and the German BioNTech, had been announced a week earlier, the Oxford/AstraZeneca jab does not need to be stored at such low temperatures, making it far easier to handle and distribute. The UK government has ordered some 355 million vaccine doses from a number of manufacturers, with the hope being that a mass immunisation programme starting this month will allow the economy to get back on an even keel in 2021. In the meantime, England is re-entering the system of tiered lockdowns, with some 99 percent of the population due to be in a restrictive tier 2 or 3 by 3 December.
Of course, this month is the last before the Brexit transition period comes to an end. If the UK and the EU have not hammered out a deal over the coming weeks then the UK will revert to World Trade Organisation rules on international trade on 1 January 2021. If this is perceived to be inevitable then the Pound could face intense pressure in December.
Over the course of November, the Pound surged against the Dollar, rising from $1.29 to $1.34. During the same period, Sterling strengthened against the Euro, only to fall back again, meaning the GBP/EUR exchange rate started and ended November at a rate of €1.11.
With the US presidential election now in the rear-view mirror, we have seen a flight to riskier assets in the past month, leading to Dollar losses. Democratic Party contender Joe Biden was deemed to have won the election, although there is some contention in a few states and outgoing President Trump has put together a legal team over alleged vote rigging. We will find out whether any legal challenge is successful on 14 December, when the Electoral College formally casts its votes to decide who is the next president. If there are any surprises here we can expect to see a reversal of the recent Dollar weakening.
The Federal Reserve has indicated it is not happy that President Trump is winding down stimulus measures earmarked for Covid-19 related economic aid, hinting that perhaps he is making a transfer of power problematic. Fed Chair Jerome Powell has indicated that the US economy is still too weak to have the $455bn fund curtailed before it has been used, leading analysts to believe that the Fed may step in and provide liquidity via monetary easing tools in January.
Against the Pound, the Greenback devalued markedly from £0.77 to £0.75 over November.
The Euro benefitted from the ongoing weakening of its rival the US Dollar during November, although in terms of fundamentals there was little cause for celebration. France and Germany, the Eurozone’s two biggest economies, moved into lockdowns as cases of Covid-19 surged across the continent. German Chancellor Angela Merkel said these measures would remain in place over December, adding:
“Given the high number of infections, we assume that the restrictions which are in place before Christmas will be continue to be valid until the start of January, certainly for most parts of Germany.”
With fears that Germany could slip into a double-dip recession – and drag the rest of the Eurozone with it – the Euro found itself somewhat restrained, despite the flight away from safe havens. Meanwhile, expectations have surged that the European Central Bank (ECB) will announce further monetary easing, even though it gave no indications of doing so in its meeting at the end of October. The main reason behind this rise in expectations is a phrase which slipped out of an ECB meeting in which the bank said it may need to ‘recalibrate its instruments’ in December if economic data continues to indicate the recovery is faltering.
With the Governing Council expected to expand its €1.35tn Pandemic Emergency Purchase Program (PEPP), it was left to ECB President Christine Lagarde to lay it out, saying, “We are going to use all the instruments that we have with the entire flexibility that we have, and I’m clearly here referring to PEPP more than others, to address the situation and to address any development of the situation.”
Whilst the Euro generally strengthened on exchanges in November, against the Pound, it remained rangebound at £0.90, although it did slip as low as £0.89 mid-month.
The Australian Dollar has benefitted from a risk-on surge due to a number of factors, not least of which was the US presidential election result. Soaring stock markets and increased trade prospects in the Asia Pacific region all had a positive influence on the Aussie, allowing it to rise a penny against the Pound, from £0.54 to £0.55.
Nevertheless, there was deepening concern about the Australian economy, with a sharp decline in construction work and quarterly decline in private capital expenditure indicating that a recovery is far from in the bag.
The Pound lost out to the Australian Dollar in November, falling from AU$1.84 to AU$1.81.
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