22 October 2020
The pound was one of the best performing major currencies yesterday, rallying sharply on hopes that the UK and EU were edging close towards reaching an agreement that would avoid a messy ‘no deal’ scenario before the end of the year.Chief EU Brexit negotiator Michel Barnier sparked an initial rally in sterling on Wednesday morning following some upbeat comments on the state of negotiations. Barnier stated that a trade deal was ‘within reach’ if both parties were to work hard to reach a compromise on key sticking points to discussions. Sterling was given a further leg up not long afterwards following the release of a report from Bloomberg that suggested negotiations would resume in the coming days, having broken down last week, and that both parties were keen to strike a deal before mid-November. Currency traders reacted favourably to the above news, sending the pound sharply higher against its peers, around one-and-a-half percent for the day to back above the 1.31 level versus the US dollar. The market is clearly optimistic that a deal is far more likely to be reached than not before the end of the transition period, even if this deal is a thin, bare bones agreement that requires further talks beyond the deadline.
Euro rally continues as investors await October PMIs
Risk assets in general were well supported yesterday, while the safe-haven US dollar sold-off against most of its peers. The euro edged higher, finishing up against the dollar for the fourth straight session. Investors remain hopeful that a deal could be struck in US Congress for the long-awaiting fiscal aid package. While the House speaker Pelosi has noted she is optimistic a deal could be reached by the end of the week, the market is slightly more sceptical so it remains to be seen whether it will actually get done. We continue to think that the move higher in the euro is rather extraordinary given the sharp increase in COVID cases recorded in the bloc in the past few weeks, which investors now appear to be overlooking. Only time will tell whether this lack of concern continues. Tomorrow morning’s business activity PMI data will be a key test to this resolve. The data will be the first real major economic release that covers the tightening of restrictions, so we think there is scope for a surprise to the downside. Certainly a composite number below the level of 50 denoting contraction will be a warning sign and could trigger a bout of weakness in the euro.
