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Currency Market Analysis

Oct 11, 2019 | Currency Market Analysis

Global Themes

Sterling scores biggest daily rise since March
- Sterling soars on Brexit deal prospects
- UK economy expected to dodge recession
- US-China trade deal optimism

Brexit

Sterling soars on Brexit deal prospects
Hopes of a Brexit deal by next week has sent sterling soaring higher. GBP/USD surged over 2% yesterday, leaping over $1.23, then $1.24 and went hunting down $1.25. It was the second biggest daily rise of the year.

A joint statement from UK PM Boris Johnson and his Irish counterpart Leo Varadkar confirmed a pathway to a Brexit deal was still possible, potentially even by next week. An Irish Times reporter stated there had been very significant movement from the UK on the customs issue, a key sticking point in negotiations, though Downing Street has not confirmed. Nevertheless, the positive vibes and hopes of a deal have lifted sterling’s spirits. Traders rushed to buy the “cheap” pound at these lower levels as no-deal Brexit fears faded. GBP/EUR is now trading over €1.13 for the first time this month having dipped to 5-week lows into the €1.10 territory yesterday morning.

The last 24 hours have once again emphasised sterling’s vulnerability to erratic price action based on unpredictable political noise. Should the UK scrape an agreement before the crucial EU summit next week, we could be looking at $1.30 and €1.17 versus the US Dollar and Euro respectively. Other notably moves in sterling-denominated currency pairs include – GBP/JPY up 2.5% in the last 24 hours, GBP/CHF up 2.1%, GBP/CAD and GBP/NZD are up 1.6% and GBP/NOK, GBP/AUD and GBP/PLN are all up over 1.25%.

UK GDP

UK economy expected to dodge recession
Despite growing recession fears globally, the UK looks like it might just avoid one given yesterday’s GDP figures. Although GDP growth in August surprised negatively, July’s figure was revised upwards to 0.4%. UK GDP in the three months to August also came in at 0.3% compared to the 0% growth in the previous three months.

The UK economy did contract in the second quarter of the year and a contraction in the third quarter will signal a technical recession. Q3 results will be revealed next month, but yesterday’s figures have helped to dispel recession fears. Growth is fragile though, related to the ongoing global trade tensions and subsequent economic slowdown, coupled with the persistent Brexit uncertainty hanging over business and consumer confidence.

So far, the Bank of England has not followed in the footsteps of the US Federal Reserve or European Central Bank in cutting interest rates, but amidst a slowing global economy, rumours of a UK rate cut are growing, which could soften sterling’s appeal.

US - China

US-China trade deal optimism
Alongside Brexit hope boosting market sentiment, there is optimism brewing around the US-China trade talks too. There is growing hope that an interim deal will be struck as both sides have signalled substantial progress has been made. Safe-haven currencies like the JPY and CHF are weakening as risk appetite floods back into the market.

Over the past year, the ongoing trade war between the world’s two largest economies has weighed on global growth. Uncertainty has tainted confidence and demand and tariffs have also reduced exports and production globally. The global economy has slowed and contracted in some parts of the world with recession risks on the rise. With both the US and China seemingly always on the brink of threatening to take more action, investors remain cautious. If a deal can be struck though, consumer and business confidence is expected to get a major boost and financial markets likely to cheer the news. In such circumstances, riskier currencies will likely climb higher as investors seek higher-yielding assets.

The Australian and New Zealand Dollars are expected to increase in value along with emerging market currencies and commodity-based currencies like the Canadian Dollar and Norwegian Krone.


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