US dollar recovers lost ground as Sterling reacts to pivotal moment in EU talks – Bibby's FX report

Tue 29 Sept 2020
Posted by: William Barns-Graham
Features
bibby fx

After a summer of setbacks, the US dollar bounced back last week after the Chair of the Federal Reserve Jerome Powell said further fiscal stimulus will be needed as the country continues to grapple with the coronavirus pandemic. 

The pound also strengthened against the euro amid renewed optimism that a deal between the UK and EU can still be reached before the transition period ends in December. 

Dollar bounce 

Powell’s indication that fiscal stimulus may be the Fed’s preferred way of dealing with the impact of Covid-19 pandemic helped boost the US dollar by 2% in value. 

The Dollar Index (DXY) had opened September by briefly dipping below 92 – its lowest level for two and a half years – but last week it rallied to as high as 94.70. 

Dollar up against pound and euro 

At the same time, speculators have been cashing in profits on the euro amidst a belief that the European Central Bank (ECB) will also introduce quantitative easing in the near future.  

The dollar rose against both the pound and the euro, with Sterling falling from US$1.30 to $1.26 by Friday 25 September and the euro declining from US$1.19 to $1.16. 

Pound outperforms euro 

The pound’s drop against the dollar should be solely interpreted in respect of the US currency strengthening.  

The real gauge of Sterling’s value is usually its exchange rate against the euro, which has increased from a midweek low of £1.08 to just above £1.10. 

This was in part due to PMI data confirming the UK’s manufacturing recovery from the pandemic, despite services output continuing to suffer.  

UK-EU deal hope

Another reason for the pound outperforming the euro were reports of a softening of tensions between the EU and the UK. 

Behind-the-scenes talks for the future trading relationship have been making some progress with the EU said to still be open to a ‘thin’ trade deal.  

The UK has also delayed the passage of the controversial Internal Market Bill, while the EU is speeding up the process of granting the UK ‘third party’ status to ensure there are no barriers to food trade between Great Britain and Northern Ireland.  

As ever, renewed optimism for a deal strengthens the value of the pound. 

Pandemic hits equity markets 

Equity markets declined throughout the week, pressured by the growing global Covid-19 infection rates and the prospect of further lockdowns. 

They did rally yesterday (28 September) after Chinese industrial profits were revealed to have risen sharply for the fourth consecutive month, boosting Asian markets and European bourses. 

Equilibrium for oil 

Oil fell from around US$40.50pb early last week to a low of $38.90.  

However, it has found some equilibrium since, trading in a relatively narrow $39.20-40.50 pb range and opening this week at $40pb. 

Gold struggles  

The stronger US dollar has led to a further fall in the price of gold, which fell from US$1950 an ounce to $1850.  

Silver fared even worse, slumping from above US$27 per ounce to as low as $21.70. 

Bitcoin also lost ground initially last week, but managed to recover almost all of its losses, opening last week and this around the $10,900 level. 

The week ahead 

The negotiations between the UK and the EU enter their last scheduled round of official talks but the Times has today reported optimism that the two sides can begin discussing the final legal text of the free trade agreement. 

A press conference on Thursday, held by chief negotiators Michel Barnier and Sir David Frost, will be provide an indication of what progress has been made. 

The UK Q2 GDP data release no Wednesday and the always crucial US Employment report on Friday will also likely have an impact on currencies.  

The first televised US Presidential debate tonight will be worth watching for several reasons, though speculators have been sanguine about the impact of the outcome on FX markets so far.  

Economic Data  

Highlights this week include: 

Today (Tuesday 29 September) 

  • Bank of England (BOE) Consumer Credit data 
  • Eurozone sentiment surveys 
  • German September inflation report 
  • US Trade balance and Redbook 
  • Speeches from the US Federal Open Market Committee’s (FOMC) Williams, Harker and Quarles 
  • API Weekly crude oil stocks 

Wednesday   

  • UK Q2 GDP and Business investment data 
  • German Retail sales and unemployment data 
  • Eurozone Inflation report 
  • US Q2 GDP  
  • ADP Nonfarm employment change (US) 
  • Speeches by the BOE’S Haldane, ECB’s Lane and FOMC’s Kashkari, Bowman and Kaplan 

Thursday   

  • Manufacturing PMIs 
  • EU Unemployment rate and Leaders meeting 
  • US weekly initial jobless claims and Personal income and spending data 
  • Speeches from the FOMC’s Harker, Williams and Bowman and ECB’s Lane 

Friday   

  • Eurozone Inflation report 
  • US Employment report 
  • Factory order and Michigan Consumer sentiment surveys 
  • Speeches from the ECB’s De Guindos and FOMC’s Harker