Second lockdown and Brexit weigh on the pound

GBP

The pound managed to regain some of the losses it has sustain since the release of the Internal Markets Bill and strengthened by one percent against both the US dollar and the euro. Sterling managed to survive the Bank of England’s dovish rate decision, which hinted at the use of negative interest rates soon. With the risk of a no-deal Brexit and rising coronavirus cases, the pound remains sensitive and may give up its recent gains.

On a data front, September UK PMI will be released on Wednesday, but this should have limited impact as Brexit will be the key driver for the pound with the ninth round of trade talks scheduled for next week. Boris Johnson has agreed to give parliament a veto over some measures of the Internal market bill. The European commission president von der Leyen said she was “convinced” a deal is possible, but the markets are currently pricing a no-deal at 50%.

USD

The dollar manged to get through the FOMC meeting unscathed as there was no unexpected extra dovishness from the FED. The statement clearly reflected the idea of averaging inflation targeting, as Fed will “aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time”. The latest projections indicate that fed funds rate will stay at the current 0-0.25 % at least until 2023. The dollar index ended the week at 93.00 after peaking at 93.60 on Thursday.

The dollar is in for a fairly quiet week in terms of data but the highlight of the week ahead will be testimony to the House from FOMC Chair Powell on Tuesday and then again, joined by Treasury Secretary Mnuchin to the Senate on Thursday. Donald Trump has been gaining ground in the polls and this should help support the dollar in the coming weeks. A second term of Trump would most likely mean new trade tariffs and is likely to weigh on the currencies of the US’ main trading partners.

EUR

Last week saw the euro weaken to 1.1737 against the dollar but then quickly recovered back above 1.18. With no economic data releases for the euro last week, the euro will mainly react to other currencies movemnets. A no-deal Brexit still weighs on the Euro but to a lesser extent than the Pound for obvious reasons. Any kind of deal would give the Euro another boost against the dollar and could lead to EUR/USD breaking back through the 1.20s.

On a data front the key focus for this week will be an update on the September confidence readings as we see the release of flash PMIs and the German IFO on Wednesday. The markets will be following this closely as August data showed a slow down compared to the sharp early summer recovery and the September data will show if this slow down as continued or not. In Italy there were regional elections with the first results expected to be publish this afternoon. Along with the election there was also a referendum to cut the number of MPs and may impact the stability of the current ruling coalition.