GBP/EUR – Pound Falls on No-Deal Brexit Threat
Comments from chief EU negotiator Michel Barnier pushed the Pound into a fresh slump as he cautioned that a no-deal Brexit scenario remains possible.
With talks between the UK and EU still deadlocked over three key issues, the possibility of a deal coming before the end of December appears limited, fuelling anxiety over the UK’s economic outlook.
If November’s finalised services PMI confirms a major monthly contraction in activity, the GBP/EUR exchange rate could shed further ground ahead of the weekend.
As the service sector remains the primary driving force of the UK economy, an expected PMI reading below 50 significantly raises the risk of negative fourth quarter GDP and a double-dip recession.
GBP/USD – Manufacturing Sector Resilience Fails to Shore Up Pound
Although the finalised UK manufacturing PMI for November saw a small upward revision, this was not enough to give the GBP/USD exchange rate any significant boost.
Worries over the wider UK outlook remain despite the manufacturing sector appearing to hold up well over the course of the second national lockdown.
A similarly positive reading from the corresponding construction PMI could offer the Pound limited support on Friday in spite of the sector’s limited contribution to the UK GDP.
However, with distribution of a Covid-19 vaccine set to begin in the UK as soon as next week, worries over the impact of the pandemic could ease, to the benefit of GBP exchange rates.
USD/GBP – US Dollar Undermined by Risk-On Trade
An unexpected increase in initial jobless claims put pressure on the US Dollar last week, fuelling fresh doubts over the resilience of the US labour market ahead of the Thanksgiving holiday.
Meanwhile, the safe-haven US Dollar weakened amid risk-on market trade driven by hopes for a global recovery, the formal transition to the Biden presidency, and resuming US stimulus talks.
Friday’s release of the latest non-farm payrolls report could put the US Dollar under further selling pressure if it fails to show an improvement on the month.
As long as signs point towards growing unemployment across the US, this could push USD exchange rates lower across the board as confidence in the resilience of the world’s largest economy falters, and coronavirus cases are worryingly high.
EUR/USD – Euro Hits Two-Year Highs against Weak US Dollar
Investors were disappointed as the German inflation rate defied forecasts to fall deeper into negative territory last month.
With annual Eurozone inflation also stuck at -0.3%, the case for greater European Central Bank (ECB) policy action continued to build.
However, this was not enough to weigh down the Euro for long thanks to a surprise improvement in November’s German unemployment rate and the single currency’s negative correlation with a weak US Dollar.
Even so, the single currency may struggle to hold onto its positive footing over the course of the week if the finalised Eurozone services PMIs confirm another month of weakness.