Currency Market Analysis

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Nov 24, 2020 | Currency Market Analysis

Global Themes

Biden transition boosts risk sentiment

• Markets cheer Biden transition
• Bailey’s Brexit warning
• Services slump weighs on UK
• Dollar demand soared after US PMI


Markets cheer Biden transition

Risk appetite is dominating this morning, thanks partly to ongoing successful vaccine news but more recently due to incumbent President Donald Trump accepting the start of the transition to a Biden administration. Risk-sensitive currencies like AUD, NZD and GBP are subsequently stronger.

Mr Trump gave the head of the General Services Administration the go-ahead to facilitate the transition, though has still failed to acknowledge defeat in the presidential election. The news came after Michigan authorities officially confirmed Joe Biden the victor of the state after a recount. Mr Biden is expected to nominate Janet Yellen, former Federal Reserve Chair, as the Treasury Secretary, which again could support market optimism about further stimulus to support the US economy through the pandemic.

• The boost to risk appetite has hoisted the risk-correlated British Pound higher allowing GBP/USD to edge back towards $1.34.


Bailey’s Brexit warning

Bank of England (BOE) Governor Andrew Bailey has stated that a no-deal Brexit would cause deeper long-term damage to the UK economy than that of Covid-19. Markets are pricing a very slim chance of a no-deal scenario, with positive news expected this week - sterling continues to climb.

Sterling hit a 12-week high versus the USD yesterday, just shy of $1.34 – a level that has only traded for two days in 2020. GBP/EUR also stretched towards €1.13, where numerous resistance levels lie. The positive vaccine news and optimism about a UK-EU trade deal being approved has buoyed demand for the pound, but the risk of a no-deal scenario still looms. In the absence of a deal, the UK and EU revert to World Trade Organisation tariffs and trade barriers and Mr Bailey believes that although the impact of the pandemic will dwarf Brexit in the short-term, the consequences of a no-trade deal Brexit could be felt for decades.

• An agreement could see sterling spike towards $1.35 versus the dollar and €1.14-€1.15 versus the Euro, but no agreement could see sterling fall towards $1.20 and €1.05 respectively.


Services slump weighs on UK

Despite the UK’s dominant services sector falling back into contraction territory this month, the flash manufacturing PMI print yesterday showed a jump to 55.2 in November, beating market forecasts of 50.5. Sterling rallied higher after the data, but the positive run ended abruptly as global risk appetite recoiled.

The positive PMI reading pointed to a strong growth in factory activity largely due to rising demand from export markets like China and the EU. It is thought pent up demand from manufacturers in the EU is linked to pre-purchasing before the end of the Brexit transition period on 31st December 2020. This was also deemed the reason UK stock piling of important goods/materials from the EU increased too. Moreover, business confidence soared to its highest since March 15 thanks to recent vaccine developments.

• However, the UK economy is more services driven and the underperformance of this sector relative to the manufacturing sector was the widest in almost 25 years.


Dollar demand soared after US PMI

The US Dollar is on the backfoot again this morning but yesterday staged a valiant rebound against its peers after investors bought into the US currency following unexpectedly upbeat PMI figures. EUR/USD fell from $1.19 to $1.18 and GBP/USD fell from about $1.34 to $1.3260 in the afternoon.

Like China, a lot of focus is on the economic recovery in America, seeing as it is the biggest economy in the world. Both the services and manufacturing sectors continued expanding during November according to flash PMI data. Both indices set new post-pandemic highs and expectations for future output jumped to their highest in over six years. The US Dollar index, which measures the dollar’s value against a basket of currencies, sprang from $92.0 to near $93, and printed a bullish candlestick formation on the daily charts.

• However, due to US political developments, the dollar is once again weakening this morning as risk sentiment improves across global financial markets.

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