Weekly Update: Pound Fluctuates on Brexit and Vaccine Headlines

GBP/EUR – Pound Shakes Off Gloomy UK Services PMI

Although November’s UK services PMI plunged from 51.4 to 45.8, indicating contraction in activity, the Pound still strengthened on Monday.

Investors were instead relieved that the PMI had not fallen even deeper into contraction territory as forecast, even though this decline still represents a significant slowdown in the key sector.

A surprise improvement in the corresponding manufacturing PMI also helped to shore up GBP exchange rates in the short term.

Meanwhile, Sterling also benefited from AstraZeneca’s announcement of a coronavirus vaccine with reported efficacy up to 90%, of which the UK government has ordered 100 million doses.

However, as long as signs continue to highlight the risk of a fourth quarter economic contraction GBP exchange rates could remain on the back foot.

 

GBP/USD – Brexit Uncertainty Weighs on Pound Appeal

The Pound trended higher against the US Dollar over the week despite UK-EU trade talks pausing in response to a negotiator’s Covid-19 diagnosis.

This limited the positive impact of UK retail sales defying expectations of a stagnant month to instead rise 1.2% in October, pointing towards a greater level of consumer spending.

However, momentary Brexit optimism from UK and EU officials that a deal is close emerged and then soon faded as uncertainty returned, with European Commission President Ursula von der Leyen reporting a few issues continue to block an agreement.

Unless markets see reason to believe that the two sides will reach an agreement in time for the December deadline, a sense of anxiety could keep GBP exchange rates under pressure.

 

USD/GBP – US Dollar Falls amid Risk-On Trade

An unexpected uptick in the latest Markit manufacturing PMI helped to shore up the US Dollar, encouraging hopes of greater resilience within the world’s largest economy.

However, USD exchange rates struggled to hold onto that bullish trend for long thanks to the latest bout of market optimism over the potential rollout of Covid-19 vaccines.

With the prospect of an end to the pandemic on the horizon, and with the formal presidential transition finally underway, the US Dollar suffered from an improvement in market risk appetite.

As US markets close for the Thanksgiving holiday, this could limit the potential for a USD exchange rate rally, given the absence of any fresh US data releases from the economic calendar.

 

EUR/USD – Eurozone Services Slowdown Fuels Euro Selling

Support for the single currency proved limited as the German and French service sectors sank deeper into a state of contraction.

With the Eurozone economy continuing to show signs of a slowdown, the appeal of the Euro naturally weakened, with investors increasingly betting on the prospect of an imminent double-dip recession.

Further losses could be in store for EUR exchange rates with the release of the European Central Bank’s (ECB) most recent set of meeting minutes.

As long as the minutes indicate that the central bank will enact fresh monetary loosening measures in December, the strength of the Euro looks set to diminish further.

Increased policymaker concern over the health of the Eurozone’s economic outlook could also weigh heavily on demand for the single currency.

Louisa Heath

Contact Louisa Heath


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