Renewed Brexit optimism after extension of UK-EU trade talks – this week's Bibby FS currency update

Mon 5 Oct 2020
Posted by: William Barns-Graham
Features

bibby currency updateSponsored content from Bibby Financial Services 

As has been the case since the 2016 referendum vote, the strength of the pound last week fluctuated on the changing likelihood of the UK and EU successfully negotiating a deal for their post-Brexit trading relationship. 

Markets were alarmed on Thursday when the EU formally launched legal proceedings against the UK after Downing Street refused to abandon plans to override sections of the Withdrawal Agreement through the contentious Internal Market Bill. 

However, optimism was renewed when prime minister Boris Johnson and European Commission President von der Leyen approved a further month of negotiations for a free trade agreement. 

Chief negotiators from both sides had confirmed sufficient progress had been made in recent talks to justify a last push for a deal. 

Talks resume on Wednesday (7 October) and the EU’s chief negotiator Michel Barnier will meet German chancellor Angela Merkel in Berlin today. Merkel suggested on Friday that the EU should show fresh flexibility in the talks. 

Pound steady vs euro

For most of last week, Sterling remained in a steady range of £1.096 and £1.104 against the euro, opening this morning (5 October) at £1.102. 

Sterling rises against the dollar 

Against the US dollar the pound started the week as low as £1.278 before climbing to a week’s high of £1.296 on Thursday and closing on Friday at £1.294. 

Disappointing US employment data 

US markets initially focussed on new employment data at the start of last week, with the Non-Farm Payroll figures reported at a disappointing US$661,000 compared to the forecast of $850,000.  

The presidential debate on Tuesday did little to affect the markets, who have so far been ambivalent about the outcome of the election in November. 

Trump illness shocks the US… 

US stock markets declined in value after the shock of the announcement on Friday 2 October of President Trump’s Covid-19 diagnosis. 

According to the Guardian, the Dow Jones initially lost 1.4% on the news but managed to pare back its losses down to 0.5% by close of business. 

…but not currency markets 

Currency markets were relatively unaffected by news of the diagnosis, with the euro-US dollar rate remaining in a narrow range of $1.169 and $1.176 throughout the week.  

The US dollar index (DXY), which opened September by briefly dipping below 92 – its lowest level for two and a half years – was up as high as 94.25 on Tuesday before ending the week at 93.75. 

Renminbi rallies 

China’s currency – the renminbi – is on course for its best quarterly rise since 2008, with the country’s onshore exchange rate increasing 3.7% against the dollar to Rmb6.81. 

According to the Financial Times, it has been “helped by a sell-off in the dollar and bets from traders that the worst of the tit-for-tat tariffs between Washington and Beijing have passed.” 

Oil prices drop 

Oil prices dropped sharply amid further worries that fresh global lockdowns could cause a lack of demand. 

WTI (West Texas Intermediate) crude fell in value from US$40.60 pb on Monday to a low of $37.05 pb on Friday, opening this morning at $37.82. 

Economic data to look out for this week 

Highlights this week include: 

Today (5 October) 

  • European PMI figures for Sept and retail sales for August 
  • US PMI’s for Sept  

Tuesday  

  • European Central Bank (ECB) President Christine Lagarde speech  

Thursday  

  • German Balance of Trade data 
  • ECB speeches from Schnabel and Guindos 
  • Bank of England speech  
  • US jobless claims 

Friday  

  • UK Manufacturing and Production data