Currency Market Analysis

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Sep 24, 2020 | Currency Market Analysis

Global Themes

Will Sunak's plan support sterling?

• UK economic woes build
• Cautious optimism supports sterling
• Risk off, as recovery hopes fade


UK economic woes build

Even before PM Johnson announced new Covid-19 restrictions, the UK economic recovery was showing signs of slowing and the British Pound was already weakening amid renewed Brexit angst. A difficult fourth quarter looms and the pound’s decline may deepen. Meanwhile, UK Chancellor Rishi Sunak is today expected to unveil new wage subsidies and extend loan schemes to avert business closures and unemployment over the next six months.

The latest economic indicators for September suggest the surge in summer activity decelerated ahead of the tighter restrictions that are now in place in the UK. Growth in consumer spending slowed sharply, and retail footfall also declined, exemplifying the delicate state of consumer confidence. Preliminary PMI surveys confirmed Britain’s services and manufacturing sectors are still growing but at a slower rate, suggesting the recovery is already tapering off. Although third quarter GDP is expected to rebound from the 20% contraction suffered in the second quarter of this year, reinstating restrictions could cause the recovery to completely stall before year-end. Consequently, Mr Sunak’s plan will be closely watched today.

  • Weak UK growth is weighing on the pound’s attractiveness and pandemic-induced pressures combined with Brexit-related uncertainty could send sterling tumbling even lower over the coming months.


Cautious optimism supports sterling

Sterling rebounded from key support levels against the US Dollar and Euro yesterday. The technical setup indicated a sharp bounce back or a sharp extension lower was due, and investors chose to jump on the positive vibe of the EU’s chief negotiator being in town to ease Brexit qualms, though pressure is mounting on sterling once again this morning.

UK senior figures such as Michael Gove are still confident of securing a trade deal with the EU, whilst the EU’s Michel Barnier said he was determined to clinch a deal. A no-deal Brexit is in nobody’s interest and is likely to send sterling plunging to lows witnessed in March versus most currency peers. GBP/USD hit $1.14 and GBP/EUR hit €1.05 during the height of the market turmoil back then. Despite the cautious optimism supporting the pound at present, the chance of a trade deal being secured before year-end is diminishing as time runs out.

  • The next key date is the EU’s summit on October 15 which both the EU and UK have set as the deadline to agree a deal. Futures markets are pricing in more GBP volatility around this time as a result.


Risk off, as recovery hopes fade

Global stock markets continue their retreat amidst rising second wave virus fears, reinstated lockdown measures and global economic recovery concerns. The risk-off market conditions have also resulted in a surge in demand for safe haven assets including the JPY, CHF and USD. 

Adding to the souring sentiment was the US Federal Reserve warning that the economic recovery in the world’s largest economy could stall without new fiscal stimulus as the deadlock in US Congress continues. Overnight, Asian stock markets followed US and European equities lower and other riskier assets including emerging market and commodity currencies also weakened. There is a huge unwinding of US Dollar short positions too, meaning investors are closing out bets on the dollar weakening. This in turn is positive for the dollar, which has rebounded higher from 2-year lows against a basket of currencies and is on track for its best month this year.

  • EUR/USD has fallen over 2% month-to-date and may continue its slide towards $1.15 if sentiment continues to sour and stock indices continues to fall.

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