Brexit Progress Underpins Pound as US Uncertainty Shifts Safe-Haven USD Demand

GBP/EUR – Improved UK Services PMI Fails to Outweigh Jobs Worries

A positive revision to September’s finalised UK services PMI failed to shore up the Pound for long at the start of the week.

While the headline PMI pushed higher into expansion territory, this was undercut by the fact that the sector experienced its seventh consecutive month of job losses.

The Pound’s appeal remained limited as markets brace for the likelihood of a significant wave of unemployment in October at the end of the government’s furlough scheme.

With employment figures released early next week expected to remain similar on the previous month, the scale of job losses may not become apparent until data in the third quarter is published.


GBP/USD – Pound Looks for Rally on Solid GDP Data amid Brexit Talks Hopes

Brexit continued underpinning Pound volatility through the week as contrasting reports sparked wild swings in GBP exchange rates.

The Pound fell sharply at the end of last week after the EU launched legal action over a breach of the Withdrawal Agreement in response to the UK government’s Internal Market Bill.

However, the Pound later recovered after the UK and EU agreed to an extension to negotiations, with hopes of a deal coming into view providing the Pound with upside potential.

Demand for the Pound could pick up on the back of August’s GDP data, with investors expecting to see solid growth on the month which would boost hopes for growth momentum through the third quarter.


USD/GBP Exchange Rate – US Dollar Driven by Shifting Risk Appetite

The US Dollar traded in a wide range over the last week, falling initially as a risk-on mood prevailed on Brexit headlines, vaccine optimism and progress in a US stimulus package.

However, US Dollar exchange rates rebounded on safe-haven demand following US uncertainty on Donald Trump’s hospitalisation from Covid-19 at the weekend, and appearing to put an end to a new coronavirus stimulus package in US Congress this week.

This safe-haven demand offset September’s weak non-farm payrolls report on Friday that showed fewer jobs than expected were added to the US economy.

Looking ahead, If the Federal Open Market Committee (FOMC) meeting minutes show increasing concern over the economic outlook and stimulus requirements, this could fuel increased uncertainty.

Even so, a stronger showing from the latest initial and continuing jobless claims figures may help to temper the downside potential of USD exchange rates.


EUR/USD Exchange Rate – Negative Eurozone Inflation Casts Shadow over Euro

The Euro struggled following the headline Eurozone consumer price index proving weaker than forecast ahead of the weekend.

With the inflation rate dipping to -0.3%, the case for further European Central Bank (ECB) policy action appeared to build, to the detriment of the single currency.

Signs that the initial economic recovery in Germany has started to falter also put pressure on EUR exchange rates, with lower industrial production fuelling market anxiety.

Evidence of greater dovishness in the ECB’s latest set of meeting minutes may equally drag on the single currency as investors bet on the prospect of further loosening to come.

Louisa Heath

Contact Louisa Heath