Sterling higher on renewed Brexit optimism
Sterling stabilised yesterday after the market mood around Brexit improved, especially after Britain said there is 66% chance that both sides will be successful in reaching a deal. Rumours also circulated that officials may actually be more positive towards a deal than they have publicly stated.
This optimism followed Boris Johnson and European Council President Charles Michel’s agreement that some progress had been made in talks, although clear differences still remain unsolved. Given the fact that rumour mill has been going into overtime, we are expecting plenty of volatility for the rest of the month. Volatility is a given at this stage, especially when we have contradictory statements and headlines constantly appearing on the negotiations. We’ve seen a rise in implied volatility gauges to two-month highs, especially covering maturities for the end of the year and proposed Brexit timeline.
However, despite the optimism on Brexit, we are seeing more caution on the economic recovery from Covid-19. The UK considers fresh restrictions and localised lockdowns that may scupper the speed of the economic turnaround. Bank of England Governor Andrew Bailey has said that he doesn’t expect a second wave to be as bad as the first wave from an economic standpoint, but they remain on standby to use necessary fiscal firepower.
The dollar fell yesterday and riskier assets benefited after investors began to increase their wagering on a Joe Biden presidency and additional US fiscal stimulus. Biden is seen as far less unpredictable than Trump and riskier assets improved as a Biden presidency is seen as more likely to remove volatility from global politics and will lead on to a steadier Sino-US relationship.
There has also been a growing expectation that stimulus will flow after the election is finished, which in turn has weakened the dollar in the short term as investor mood has picked up and accelerated their willingness to buy riskier assets. With a Biden presidency, investors expect that a democratic administration will be eager to spend.
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