Lockdown Dents Sterling Recovery
Speculative rumours on Friday suggested that significant headway had been made in the EU/UK trade with further drafting of legal texts expected soon. There were however, still differences in the area of fishing which is proving a constant barrier.
Sterling pushed up but failed to challenge the 1.3000 level against the Dollar and similarly rose to above 1.1130 against the Euro before retreating lower. CFTC data recorded a net increase in short Sterling positions to 7,000 contracts in the latest week from 2,000 previously which suggested little enthusiasm for buying the UK currency.
On Saturday, Prime Minister Johnson announced that England would be placed in a 4-week lockdown from November 5th in order to slow the increase in coronavirus cases. It was also announced that the furlough job protection scheme would be extended until the end of November. There will be further upward pressure on government borrowing and increased pressure for the Bank of England to take additional action at this week’s policy meeting which undermined Sterling sentiment.
The resurgence of risk has boosted the US Dollar across the board, with risk aversion appearing to be the key driver in the recent strength rally of the greenback. Also, analysts pointed to end of month flows as further reasoning for extended gains. The Dollar is approaching recent highs and is consolidating important weekly gains across the board.
Economic data released on Friday came in better than expected but it did not help to offset the current tone across financial markets, dominated by precaution ahead of US presidential elections and amid increasing concerns of the impact of the coronavirus spread.
German GDP increased 8.2% for the third quarter of 2020 following a 9.8% decline previously and above forecasts of 7.3%. Italian GDP also posted a 16.1% increase for the quarter, well above expectations of 11.2%. For the Euro-zone as a whole, GDP increased 12.7% compared with consensus forecasts of 9.5%, but there were strong expectations that there would be a weaker performance for the fourth quarter. The Euro-zone CPI inflation rate was unchanged at -0.3% for October, in line with consensus forecasts, and the underlying rate was also unchanged at 0.2%.
There were further concerns surrounding Eurozone coronavirus developments, although there were also further concerns over US trends as the number of new cases increased to a record high of close to 100,000. The Dollar overall strengthened, pushing the Euro lower to monthly lows as an increase in defensive demand supporting the Greenback.
The Euro was unable to hold onto any gains after briefly breaking through the 1.1700 area and gradually lost ground. As of writing, The Euro currently trades just above the 1.1630 against its US counterpart.
Data to watch
10:30 – GBP – Final Manufacturing PMI
16:00 – USD – ISM Manufacturing PMI