Over the last month the Pound has fluctuated quite widely, although on the whole it ended up stronger against the other major currencies. In the early part of October there was a patch of weakness related to Brexit woes, with losses against the US Dollar. There were also losses against the Euro, but all this turned around in late October when a sudden surge in optimism about there being a trade deal between the UK and the EU gave Sterling a lift. Many of the Pound’s earlier losses were won back, and the Pound even received an extra boost following the US election as investors sought to pull out of the safe haven US Dollar.
The enforcing of a new lockdown across England means the UK economic recovery is once again skating on thin ice. It was already looking unsteady before the Prime Minister Boris Johnson unveiled a new system of region-specific lockdowns to slow the spread of Covid-19, and this will heap further pressure on an economy struggling to emerge from crisis. All in all, this is having a subduing effect on the Pound
UK Chancellor Rishi Sunak has heralded a new – less generous – system of wage support for furloughed workers over the coming months. Called the Job Retention Scheme, the government will pay up to half of the wage bill for workers who have been hit by Covid-19 related business shutdowns. Under the revised scheme, employers will pay less and staff can work fewer hours before they qualify. The scheme is designed to save jobs as fears grow that unemployment could hit levels not seen since the 1980s by Christmas.
As the US election passed and Democratic Party candidate Joe Biden was declared by the media as the winner, traders have been busy selling US Dollars and backing more risk-sensitive currencies, such as the Euro and the Pound.
October was a rocky month for the US Dollar, with a marked dip mid-month followed by a rebound. November hasn’t been as kind so far to the greenback, as traders had been holding their breath before the election only to hit the sell button as soon as it had passed.
There was big economic news at the end of October when the third quarter GDP economic 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.
The Euro has gradually drifted lower against the Pound over the past month, leading the GBP/EUR exchange rate to appreciate to €1.11.
Just as in the US, the Eurozone also saw a rebound in economic activity with a record-breaking rise of 12.7 percent in Q3. Although this followed the record slump of 11.8 percent in Q2 it was still better than economists had forecast and allowed the Euro a little respite.
But it wasn’t really the economy that Euro traders were focusing on, instead they were concerned about the record-breaking rates of Covid-19 infections that are sweeping the continent. Both France and Germany went into some degree of lockdown over the previous month, and an outbreak of a new strain of the virus detected on a Danish mink farm has added to fears that a new variant could spread.
All this adds up to a rising sense that the Euro faces challenges in the near future, despite a depreciating US Dollar.
The Pound rose against the Australian Dollar at the start of October before plateauing and falling again after the US election. Investors, keen to pile into higher yielding but riskier currencies took advantage of the seeming drop in global risk, causing the Aussie to rise. By 9 November, GBP/AUD was trading at AU$1.81.
For the rest of November markets will likely be looking at the aftermath of the US election as investors assess the level of risk. At present, there is still the likelihood that the result will be contested by President Trump, which could pave the way for a Supreme Court hearing. Should this come to pass then we can expect a return of ‘market fright’, meaning the Pound would come under pressure once again.
Aside from this, the main catalyst for movements in the Pound will be the state of Brexit negotiations. We should know in the next few weeks whether there will be a deal or not, and whether key sticking points such as fishing rights and the level playing field can be overcome. Any announcement of a robust deal will almost certainly see Sterling soar on markets.
This, of course, takes place against a backdrop of deteriorating economic condition is the UK. As the second period of lockdown gets under way, the extent of the damage to the economy will be of key interest to market traders. If the lockdown is extended into or even beyond the beginning of December, we can expect to see the Pound coming under increased pressure in relation to its rivals.
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