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Currency Market Analysis

Sep 30, 2020 | Currency Market Analysis

Global Themes

Markets unfazed by Trump, Biden clash

• Markets unfazed by first debate
• BOE confusion on negative rates
• Euro springs back

USA

Markets unfazed by first debate

The first presidential debate between President Donald Trump and Democratic rival Joe Biden took place in the early hours of this morning in what was a rather chaotic encounter with both candidates insulting each other. The market reaction was muted, though the US Dollar edged slightly higher and stocks slightly lower.

One clear takeaway from the debate was the President reinforcing that if Mr Biden wins, then Mr Trump might not accept the result and may not transfer power peacefully. This could make for a turbulent and ugly few months after the election in early November and could fuel risk aversion across financial markets and benefit safe haven currencies like the USD, JPY and CHF.

  • The heated debate overall has done little to the confidence of investors, and the odds from both candidates remain unchanged for now. EUR/USD has rebounded from 8-week lows this week, as traders take profit on the dollar’s strong September performance.

BOA

BOE confusion on negative rates 

Bank of England (BOE) policymakers have provided mixed messages about negative interest rates in the UK over the past few weeks. Investors have been on their toes and the pound has been sensitive. Yesterday, BOE governor Andrew Bailey confirmed the bank had not ruled out taking rates below zero for the first time, which sent sterling lower on the day.

The pound has made a positive start to the week overall as hopes of a UK-EU trade deal remain alive, with talks of a joint legal text agreement expected to last until Friday. It is an important week for Brexit and if progress is made in fishing rights or state-aid then sterling is expected to jump. However, limiting sterling upside might be negative interest rates in the future and ambiguity around this topic has stifled a move up to $1.30 against the US Dollar recently. Deploying negative interest is expected to drag on the value of the pound, making November’s looming policy meeting an important one.

  • In the currency markets, the pound has started the day off on the backfoot as it looks set to end what has been a dismal month against most currency peers. GBP/USD is nearly 4% weaker and GBP/EUR is about 2.5% weaker.

EUR

Euro springs back

Despite German inflation weakening, the Euro rebounded higher yesterday taking GBP/EUR back beneath €1.10 and sending EUR/USD north of $1.17 again. The stronger Euro was likely a result of the continued improvements in Eurozone consumer confidence, which has now strengthened for five months straight.

On the data calendar today, Eurozone inflation results as a whole drop in at 10:00 and are expected weaker given Germany’s results yesterday. The inflation rate in Europe’s economic powerhouse fell by 0.4% y/y – the biggest contraction in over five years. This deflationary impact of the coronavirus pandemic is expected to put additional pressure on the European Central Bank to ease monetary policy, particularly as European countries face a second wave of infections and reinstated lockdowns.

  • Elsewhere, UK and US GDP numbers for the second quarter of the year will be released today, but they are final figures, so the market reaction is likely to be subdued.


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