Pound/US Dollar (GBP/USD) stable at $1.30

Pound/Euro (GBP/EUR) rises to €1.10

Pound/Australian Dollar (GBP/AUD) stronger at AU$1.81

During September and the first half of October, the Pound has remained stable, even rising a little, against the other major currencies. The first half of September was beset by weakness for Sterling as it found itself at the mercy of speculative Brexit headlines. These losses were greatest against the US Dollar, with Sterling losing almost 4.5 percent in September. Losses against the Euro were not as severe, although the Pound did slip against the Australian Dollar, which was devaluing on FX markets as risk appetite dried up. There was then something of a reversal of fortune in late September and the Pound has since clawed back some of its losses and remained on a strong footing.

BRITISH ECONOMY REMAINS A MAJOR CONCERN AS PM UNVEILS THREE TIER LOCKDOWN SYSTEM

The UK economic recovery was already looking unsteady before the Prime Minister Boris Johnson unveiled a new system of region-specific lockdowns to slow the spread of Covid-19. The announcement will heap further pressure on an economy struggling to emerge from the damage caused by the nationwide lockdown earlier in the year, and limit the prospects of the Pound breaking higher.

At the same time, UK unemployment figures are in the spotlight, with a fifth of bosses saying they plan to slash workforce numbers by Christmas according to a poll conducted by YouGov. The bulk of the job losses will be in the hospitality sector, although white collar jobs will also be at risk.

Nevertheless, despite these worrying economic developments, FX markets are still taking their cues from the state of Brexit negotiations to determine the value of the Pound. As the UK and EU prepare to enter the final intense stage of the negotiations, the Pound is becoming more susceptible to the day-to-day likelihood of a trade deal being reached, or not.

US DOLLAR CONTINUES TO STRENGTHEN AS ELECTION DRAWS NEAR

The last few weeks have seen continued strong demand for the US Dollar, primarily as a safe haven asset due to an increased number of Covid-19 cases, as well as the uncertainty ahead of the looming election. This has kept up the pressure on the GBP/USD exchange rate, although the Pound was able to reach a high of $1.31 on 13 October.

The US economy has been outperforming expectations on the economic data front, bouncing back from the damage wrought by the economic lockdown. There was a 15-point jump in consumer confidence in September – the largest jump in 17 years – taking the index above 100 for the first time in several months.

The jump comes after a big drop in the number of unemployed Americans in August, and news that over three quarters of a million jobs were created by US companies in September alone – smashing expectations.

Also benefitting USD was the first televised debate ahead of the November presidential election, with incumbent President Trump going up against his challenger the Democrat Joe Biden. In what proved to be a bad-tempered exchange between the two, no clear winner emerged, leaving traders uncertain about how the election will pan out, and the possibility of a contested vote adding to risk fears. The President subsequently was admitted to hospital after testing positive for Covid-19, only to emerge days later in a recovered state, although this had little effect on the Dollar.

EURO WEAKENS AS INFLATION DIPS

The Euro has struggled over the past month, allowing the GBP/EUR exchange rate to rise from €1.08 to €1.10.

The main driver of the current Euro weakness is the threat of deflation in the Eurozone. The recent poor run of inflation data suggests the Eurozone is having trouble breaking free from the effects of the Covid-19 lockdowns earlier this year, despite record amounts of stimulus. As new cases mount across Europe, investors are concerned that the economic impact will lead to a fresh plunge in demand.

This seems to be reflected in the latest ZEW economic survey of Eurozone businesses, which found that morale had plunged to its lowest level since May.

POUND RISES AGAINST AUSTRALIAN DOLLAR ON RISK FEARS

As a risk and trade sensitive currency it’s little surprise that the “Aussie” has been under pressure over the last few weeks. Furthermore, being at the centre of a Covid-19 outbreak that has seen draconian action taken to stop the spread in Victoria, AUD was particularly sensitive to bad news. Data-wise, private credit flatlined in September, while the number of new dwellings approved fell by 1.6 percent month-on-month.

Despite the headwinds faced by the Australian Dollar, the Pound was unable to fully capitalise on its weakness due to being held back by Brexit worries. Nevertheless, Sterling put in a strong performance against the Australian Dollar, with the GBP/AUD currency pairing rising from AU$1.76 to AU$1.81 over the last four weeks.

WHAT TO LOOK OUT FOR IN THE COMING WEEKS

The rest of October moving into November could see a number of surprises across FX markets. Of course, the main thing to look out for is the US election on November 3. As it stands, a clear win for the incumbent President Trump would likely boost the value of the US Dollar. However, some analysts predict the Dollar will receive a boost whatever the outcome, either due to a clear win or on fears of ongoing chaos in a contested vote.

Either way, the main driver for the Pound is likely to be the result of the Brexit negotiations with the EU. As Boris Johnson’s deadline looms, news of a deal will no doubt boost Sterling, while any kind of extension or fudge could weaken the British currency.

At the same time, the extent and timing of any further lockdown measures imposed on the UK economy could seriously impact the value of GBP. If investors feel that health policy is damaging economic policy, then we could see a cycle of devaluation hitting the Pound.