s we thought that it would, the sharp increase in COVID-19 cases in Europe has finally begun to be reflected in a more meaningful way in FX so far this week. The dollar is on course for its best weekly performance in a month, while the euro is back hovering around its lowest level since late-September as rising virus numbers are causing authorities in Europe to announce fresh lockdown restrictions by the day. 

London is set to enter into the UK government’s tier-2 restrictions at midnight tonight, with a number of other major cities in the north of England poised to enter into the tier-3 bracket, where hospitality and leisure venues are closed and gatherings of people are severely restricted. France has also imposed a 21:00-06:00 curfew in nine cities this week, including the capital Paris. The main concern here for investors is the impact that these restrictions will have on the global economic recovery. We see a slowdown in growth in Europe in the fourth quarter of the year as almost inevitable, with the length and severity of future measures now key as to whether or not we see a double-dip recession.

Next Friday’s European flash PMI data for October is now likely to take on added importance and will be the first major piece of economic news covering the period of significantly tighter restrictions. In the meantime, investors may take their cue from this afternoon’s US retail sales data for September.

Sterling choppy amid mixed Brexit signals

Under normal circumstances, this week’s Brexit talks would likely be stealing most of the headlines, although news here has been somewhat overlooked by markets in favour of the latest virus developments. It’s been an up and down week for the pound, with investors eagerly awaiting any news out of the UK-EU negotiations. Sterling sold-off again yesterday, although has stabilised back above the 1.29 level this morning amid mixed headlines out of talks that has left the market none the wiser as to whether a deal is imminent any time soon. Boris Johnson’s deadline for reaching an agreement has come and gone, although this was very much a soft, self-imposed deadline and there is general expectation that talks will continue into next month. The PM is expected to set out his approach to Brexit later today, so some volatility in the pound surrounding this announcement is certainly possible.