12/10/2020

Market sentiment shifts


GBP

Sterling traded close to month highs against both the euro and dollar on Friday. Market sentiment shifted to risk on due to rising hopes that a Brexit trade deal and US stimulus package can be agreed.

Despite the move higher, sterling has found difficulty in breaking through its current trading range and the headline sensitive pound has faced considerable intra-day volatility. The renewed Brexit optimism has helped provide a level of support for sterling despite the UK and EU being a matter of months away from a no deal Brexit.

Investors are bracing themselves for heightened volatility this week ahead of the crucial EU summit which UK Prime Minister Boris Johnson has set as his Brexit deadline. Johnson has mentioned in previous weeks that progress will need to be made by this stage or risk the UK government walking away from a deal.

In addition to this, the British Chancellor Rishi Sunak announced new job retention measures in a bid to tackle the expected rise in UK unemployment. The new scheme will throw a vital lifeline to businesses who are forced to close completely due to local or national lockdowns by subsidising two thirds of staff wages. The move helped support sterling on Friday, but has faced some criticism. For instance, businesses that are able to open but have less footfall or have curfew restrictions aren’t included in the new measures leaving some businesses with no option but to cut jobs.

There was cause for concern for the health of the UK economy on Friday as the latest GDP reading for August showed the economy growing at its slowest rate since May. According to the data released by the Office for National Statistics Britain’s GDP rose by 2.1% but fell comfortably short of market expectations of 4.6%.

USD

The dollar fell close to one-month lows on Friday as investors reversed some of their safe-haven positions in favour of more riskier assets.

Having already tweeted earlier in the week to withdraw from negotiations until after the election, President Trump was back at the negotiating table and mentioned he was open to a larger deal as US House Speaker Nancy Pelosi and Steve Mnuchin would resume talks on Friday.

Growing expectations that Joe Biden will win the US presidential election added insult to injury to the dollar on Friday and contributed to the reversal of safe-haven positions. Riskier assets were the beneficiary, as a Biden win is expected to result in a larger stimulus package and be a calming influence on US-China trade tensions.

Key announcements

None


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