Weekly Update: Pound Hits Two-Week Best as Odds of Negative BoE Rates Fall, US Presidential Election Drives USD Volatility

GBP/EUR Exchange Rate – Pound Recovers Ground as BoE Talks Down Negative Interest Rates

The Pound received a boost this week as Bank of England (BoE) policymakers appeared dismissive of the possibility of interest rates turning negative in the near future.

Comments from chief economist Andy Haldane offered further encouragement to investors as he called for greater optimism over the performance of the UK economy.

Coupled with strong signs of recovery in the domestic housing market and a positive revision to the finalised second quarter gross domestic product, GBP exchange rates saw limited downside.

Even so, the Pound remains vulnerable to any resurgence of Brexit-based anxiety as markets await the outcome of the final scheduled round of UK-EU talks, despite benefitting from some optimism early in the week.

As long as the possibility of a no-deal scenario remains on the table, this should keep the Pound under pressure against its rivals.


GBP/USD Exchange Rate – Fading Economic Recovery Concerns Limit Pound Demand

Concerns over a loss of recovery momentum dented the Pound last week as both September’s UK manufacturing and services PMIs showed a slowdown, while the threat of stricter coronavirus increased.

While the manufacturing and service sectors still delivered positive growth on the month, investors were disappointed to find that some of the initial recovery momentum has started to fade.

Chancellor Rishi Sunak’s ‘Winter Economy Plan’ also weighed on the GBP/USD exchange rate as the new scheme to support jobs is seen as less generous than the furlough scheme.

With no change forecast for the finalised manufacturing PMI reading, the Pound may struggle to find any fresh rallying potential in the near future. Instead, the Pound will likely be driven by the developing coronavirus situation and progress in the UK-EU Brexit talks.


USD/GBP Exchange Rate – Increasing Political Tensions Drive US Dollar Volatility

Confidence in the underlying health of the US economy took a blow last Friday as August’s durable goods orders fell short of forecast.

Growth in orders slowed from 11.7% to just 0.4% on the month, highlighting the challenges that the world’s largest economy still faces as a result of Covid-19 disruption.

Increasing political tensions ahead of the November presidential election also diminished the appeal of the US Dollar, with the possibility of any further fiscal stimulus appearing to evaporate.

However, the mood of USD exchange rates saw an uptick on the risk-off tone that resulted from a tense first presidential debate, and could rise further ahead of the weekend if September’s non-farm payrolls report proves encouraging.

If the unemployment rate dips from 8.4% to 8.2% as anticipated, the US Dollar could make solid gains on Friday.


EUR/USD Exchange Rate – Euro Shakes Off Negative German Inflation Rate

The Euro strengthened on an improvement in market sentiment this week despite the German consumer price index showing a month of negative inflation in September.

Although inflationary pressure within the Eurozone’s powerhouse economy continues to trail well below the European Central Bank’s (ECB) 2% target, markets largely dismissed the data.

Even so, weakness could be in store for the single currency on the back of the latest Eurozone unemployment rate.

Forecasts point towards an uptick from 7.9% to 8.1% in August, offering fresh evidence of the pressures coming to bear on the Eurozone labour market.

A similarly underwhelming performance from the Eurozone consumer price index may also expose the Euro to some selling pressure this week.

Louisa Heath

Contact Louisa Heath