Sterling set to accelerate higher

GBP

The Pound finished the week just north of the 1.12 handle against the Euro and just below 1.33 against the Dollar. Though a positive week overall for Sterling it never manged to break through the key resistance levels of 1.1215 and 1.3310 and instead spent week bouncing back off them. Should these levels be breached we could see the rally resuming to levels not seen since August. No significant news broke last week regarding a trade deal between the UK and the EU though progress is apparently being made which is keeping the pound buoyant. Away from Brexit, the UK posted slightly better than expected CPI figures on Wednesday coming out at 0.7% versus a prediction of 0.6%. This is a 0.2% increase from the reading the month before and shows inflation rising in the UK which should lower the odds for negative interest rates and therefor take away some risk against the Pound.

Sterling will be at the mercy of both Brexit and the Coronavirus this week as markets await more news on the negotiations and a Government announcement regarding if there will be an extension to lockdown measures into December. The closer we get to the Brexit deadline then the smaller the boost to Sterling will be if a deal is done as markets expect it to be rushed and therefor a “thin” deal. The risk caused by Brexit over Sterling is limiting the gains it should be seeing against a weak Dollar so if a deal does get made then many analysts are predicting GBP/USD to be above 1.40 by the end of 2021. In the short term though the pound will be sensitive to news about how the Government plan to bring the UK out of lockdown as well as their plans for Christmas giving the impact on retail sales the festive period brings.

USD

Last week concluded the third week in a row that the Dollar lost ground against Sterling but managed to stay just about flat against the Euro. Hospitalisations and Coronavirus cases hit a new high in the States with local governments having to take action to try and stem the rate of infection, this included New York closing its schools. The markets are continuously reassessing the risk of growing case numbers versus the expectations of a vaccine which is causing volatility across the board but especially in safe-haven currencies like the USD. Though with each new vaccine announcement the price action decreases as the novelty wears off.

The dollar is expected to be reasonably stable this week as though there are some notable data releases, they are not expected to be market moving. Monday will see the release of Services PMI and Wednesday brings Durable Goods, the second GDP reading for Q3 and the FOMC minutes. Only the latter could cause some volatility depending on how the markets view the discussion on further quantitative easing. Trump has yet again failed to concede but this will only start to cause the Dollar weakness if he starts making serious threats about not leaving the White House come January.

EUR

EU leaders failed to agree to an EU Budget and Recovery fund as both Poland and Hungry put up strong opposition last week though rumours coming out of the EU are that they are both starting to come round to a compromise. But with any tensions within the EU can lead to Euro weakness as fears of countries following the UK out Europe grow. As with most of the western world EU members continue to struggle with rising virus cases but tension has started to grow with restrictions as seen in Germany with protests against the Government’s handling of the Pandemic. Christine Lagarde made several speeches last week but did not cover any new ground and instead repeating her message of needing to re-calibrate the tools used by the ECB.

Brexit negotiations will continue to impact the Euro and any potential announcement of a deal will give the common currency a boost though not as much as it will for Sterling. The Euro could be in for a hard start this week with composite PMI’s released first thing this morning and is expected to fall below 50 for the first since July. This fall is mainly due to the fall in services as increased lockdown measures have been introduced and force such businesses to close. Continued positive vaccine news is needed to counteract this as it should help convince investors that this fall is only short term and economic recovery is just round the corner.