GBP/EUR – Pound Weakens as UK Heads into Second Lockdown
As the UK prepared to enter a second national lockdown, the mood towards the Pound largely soured, with investors wary of the potential for a greater economic slowdown.
With all non-essential shops set to close for the entirety of November in response to the government announcement, the odds of a possible double-dip recession picked up sharply.
This left the Pound on a weaker footing against its rivals, particularly as anticipation for Thursday’s upcoming Bank of England (BoE) policy meeting grew.
As markets now expect to see the BoE deliver a dovish message at its November meeting, support for GBP exchange rates may prove limited in the near term.
If policymakers express greater openness to the prospect of negative interest rates, this could put even greater pressure on the Pound.
GBP/USD – UK Service Sector Slowdown Weighs on Pound
October’s finalised UK manufacturing and services PMIs added to the bearish outlook of GBP exchange rates, both pointing towards a loss of momentum.
Markets were particularly disappointed by a negative revision to the final services PMI reading, which showed a sharp slowdown from 56.1 to 51.4 on the month, closer to stagnation.
With the UK service sector showing greater signs of vulnerability, confidence in the wider economic outlook diminished, to the detriment of the Pound.
However, ongoing Brexit trade talks between the UK and EU may still offer some support to GBP exchange rates if officials signal continued optimism over a potential deal.
USD/GBP – Election Uncertainty Supports Safe-Haven US Dollar
A better-than-expected uptick in the annualised third quarter US GDP helped to shore up the US Dollar ahead of the weekend despite doubts lingering over the economy.
The appeal of the US Dollar then surged on US election uncertainty, with the difference between Trump and Biden far tighter than investors had expected a day before.
Although a prolonged election process limits the chances of any imminent fiscal stimulus package, this sense of uncertainty will likely support USD exchange rates as market risk appetite fades.
However, signs of dovishness at the Federal Open Market Committee policy meeting could see the US Dollar come under fresh pressure.
EUR/USD – Euro Fails to Benefit from Stronger Third Quarter Eurozone GDP
The European Central Bank (ECB) failed to encourage demand for the Euro as it signalled its intent to enact fresh monetary policy loosening in December.
Although both the third quarter German and Eurozone GDP reports showed a major surge in growth, this was not enough to ease anxiety over the economic outlook.
Fears of a double-dip recession look set to limit the appeal of the Euro in the days ahead, especially in the face of the US election uncertainty and Europe’s worsening coronavirus situation.
Unless September’s German industrial production figure shows a strong rebound on the month, the single currency may struggle to find any particular support in the near term.