Weekly GBP/USD/EUR Update: Pound Slumps as Covid-19 Second Wave Threatens Economic Momentum, US Dollar Rallies on Safe-Haven Demand

GBP/EUR Exchange Rate – Pound Support Limited Thanks to Underwhelming UK Services PMI

Support for the Pound remained muted today as September’s UK services PMI fell short of forecast, dipping from 58.8 to 55.1.

Although this still represented a solid month of expansion for the sector, investors were disappointed to find signs that economic momentum has already started to falter.

The GBP/EUR exchange rate may struggle to find much support in the days ahead as fears of further economic disruption building in response to the growing risk of a second wave of Covid-19 infections and new restrictions in the UK.

The mood towards the Pound is unlikely to improve later in the week as the GfK consumer confidence index for September looks set to remain deep in negative territory, well below pre-pandemic levels and showing little sign of improvement.

Unless consumers show signs of greater optimism the risk of a fresh slowdown in activity heading into the final months of the year could drag the Pound lower across the board.

 

GBP/USD Exchange Rate – BoE’s Discussion of Negative Interest Rates Drives Pound Losses

The Bank of England (BoE) prompted a sharp decline in demand for the Pound last week as policymakers indicated that they had been briefed on how negative interest rates might be implemented.

While it was later clarified that the BoE has no intention of implementing negative rates in the near future, this still weighed heavily on GBP exchange rates.

Growing tensions over the issue of Brexit also put a dampener on the Pound, with the EU now reported to be considering a no-deal scenario as its base case in economic projections.

As long as the threat of Covid-19 and a no-deal Brexit scenario continue to hang over the outlook of the UK economy, this may keep the Pound biased towards the downside.

The GBP/USD exchange rate looks set to remain on the back foot while forecasts point towards a fresh decline in September’s CBI distributive trades index, signalling renewed weakness within the retail sector.

 

USD/GBP Exchange Rate – US Dollar Shored Up by Global Covid-19 Anxiety

A general surge in safe-haven demand helped to bolster the US Dollar in recent days, in spite of increasing political tensions ahead of the presidential election.

Even though political disagreements look set to quash the prospect of any further economic stimulus, the US Dollar pushed higher across the board thanks to fears of a renewed global slowdown.

Another weekly improvement in initial and continuing jobless claims may encourage USD exchange rates to hold onto their bullishness on Thursday.

As long as the labour market shows signs of heading in the right direction, pushing down unemployment in spite of pandemic concerns, demand for the US Dollar is unlikely to fade.

 

EUR/USD Exchange Rate – ECB’s Mixed Messaging on Euro Strength Fuels Volatility

Comments from European Central Bank (ECB) President Christine Lagarde fuelled some marked volatility for the Euro over the course of the last week.

As Lagarde initially appeared to have little concern with the relative appreciation of the Euro, investors continued to pile into the single currency ahead of the weekend.

However, as subsequent comments indicated that the ECB is still monitoring the strength of EUR exchange rates, the Euro failed to hold onto its run of gains on Monday.

The single currency could continue trending lower, especially in the wake of a surprise contraction in the Eurozone services PMI, without a solid improvement in the German IFO business sentiment index as the bloc’s economic outlook looks increasingly grim.

On top of this, the alarming rise of coronavirus cases in Europe will continue to pressure EUR exchange rates as countries begin to implement new restrictions.

Louisa Heath

Contact Louisa Heath


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