GBPUSD & EURGBP, H1
On Friday as the news broke that UK PM Johnson was to announce “Lockdown II” for England, we highlighted the longer term support and resistance areas for Cable. Today, the Pound is in decline as markets react to weekend news that England will be heading into a one-month lockdown from this Thursday, which could be extended according to senior cabinet minister Gove. Germany and France have already started one-month lockdowns, while tight restrictions are being imposed in many other European countries. Cable dove into two-week low terrain to the key October support around 1.2865, before recovering on better than expected PMI data, while EURGBP reversed most of the decline seen on Friday and then again turned lower but remains north of 0.9000.
Europe is now heading back into economic recession, although this shouldn’t be as deep as seen earlier in the year given that the level of restrictions is overall much less severe than they were before (manufacturing premises will remain open in the UK, for instance), and with much of the rest of the world’s economies remaining open. The asymmetry between Europe and the rest of the world, especially Asia, should nonetheless pitch the European currencies on a weakening path against the Dollar and Yen. The BoE’s Monetary Policy Committee meets this week (announcing Thursday) and is expected to expand its asset purchase program by 100 bln pounds. Given the developments, the possibility of the BoE taking the repo interest rate negative is also up, and while perhaps not at this juncture, it is conceivable that the central bank will at least de-emphasize its “contingency planning” labelling of negative rates. On the Brexit front, the EU and UK negotiating teams will remain in talks this week in Brussels. The general expectation remains that a deal will be struck by mid month, though we’re still waiting on concrete news about progress on the sticking points. French Europe minister Beaune said in a BBC interview on Sunday that “we would like a deal” to preserve fishing access to UK waters, which is a fresh sign that a compromise on the principal obstacle to an accord is in the works.
Elsewhere, the Euro is down moderately against the Dollar, though enough to put the pair at a five-week low at 1.1620. USDJPY is modestly firmer, but rejected the 105.00 level and trades around 104.70, supported by the 200-hour moving average. The US election is up tomorrow. Polls point to a Democratic sweep, but there was a large polling error in 2016 and the possibility for the same is there again given so-called shy Trump voters (who don’t declare their true intention to pollsters) are seen as outnumbering shy Biden voters.
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Stuart Cowell
Head Market Analyst
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