Exchange Rate Markets Fixate on U.S. Vote Outcome

- GBP volatile as markets keep an eye on U.S. vote outcome
- EU and UK trade talks paused, resume Sunday

- GBP/EUR rally suggests ongoing optimism

Biden U.S. Vote

Above: Joe Biden. Photo by Adam Schultz / Biden for President.

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The British Pound traded softer against the Euro and Dollar and other 'safe haven' currencies through the mid-week session and into Thursday as investors levelled bets on the UK currency in light of ongoing uncertainty in the U.S. election, which is proving to be the premier driver of foreign exchange market action.

Short-term, foreign exchange markets will likely remain focussed on the outcome of the U.S. election where both candidates await the final results from a number of key states.

Wisconsin and Michigan - two important swing states - have both called for Democrat challenger Jo Biden overnight, confirming he is edging closer to the magic 270 electoral college votes required to take the White House.

At the time of this article's update on Thursday, Biden is closing in on Trump in the key battleground of Georgia, hoping to flip a third state from the Republicans and put himself within touching distancing of the White House.

But his fortunes have begun slipping away in Arizona where the race has tightened to give Mr Biden a lead of just 79,000.

No result has yet emerged in Pennsylvania, but it is understood that because he has taken both Wisconsin and Michigan a win in this state could hand Biden the keys to the White House.

The Pound rallied sharply against both the Dollar and Euro on Tuesday amidst a broad-based advance by stock markets and other 'risk on' currencies which appeared to be gearing up for a Democrat 'blue wave' outcome to the U.S. election, a scenario whereby the party seizes control of both the White House and the Senate.

However, it is clear at the time of publication that this scenario is unlikely to materialise, particularly as the Republicans look set to retain hold of the Senate, and the Pound has duly rotated back to levels where it was to be found 24 hours previously.

The Pound-to-Euro exchange rate had rallied to a two-month high at 1.1174 but is now back at 1.1090, the Pound-to-Dollar exchange rate had rallied as high as 1.3140 before paring gains back to 1.2960.

The outcome of the vote remains in the balance and a final result will only be known once postal votes in a number of key states are made known.

"Currencies remained on a wavering path ahead of the final results of the election which could take hours, days or weeks. Meanwhile, prospects for bold stimulus appear more uncertain should Joe Biden ultimately prevail but the Republicans retain control of the Senate. Choppy, erratic currency trading appears on the cards," says Joe Manimbo, a foreign exchange analyst at Western Union.

November trade in GBP/EUR

Above: Gyrations in GBP/EUR this November

The Dollar has stabilised back to levels close to where it was on election day, suggesting markets taking the outcome in their stride and might not be overly concerned with whether Donald Trump or Joe Biden win.

"We were so ready for chaos, that the chaos was taken off the table by our readiness for that chaos. Now we have what could be a contested result and the market is perfectly calm," says Brent Donnelly, a spot foreign exchange trader with HSBC in New York.

Donnelly has produced the following graphic to confirm markets are actually relatively unfazed by the prospect of either Biden or Trump taking the White House:

Market comparisons

Image courtesy of Brent Donnelly, HSBC

He explains this relative sanguine approach has more to do with the importance of the Senate race than that for the Presidency.

"While I understand that the election is not over, with the Blue Wave off the table, the final tally should be kind of irrelevant to G10 FX. The only thing that mattered for the USD was the Senate. The President is making the usual noises about the rigged election but it seems like people and markets have become so used to the noise that it barely registers at this point," says Donnelly.

Were the Democrats to have take the Senate, the prospect of a sizeable stimulus would have increased significantly, even with Trump in the White House. This is largely a result of the market understanding fiscal 'hawks' in the Republican Senate as being the major blockage to generous stimulus.

At the time of publication the Republicans are just 3 seats shy of a majority in the Senate:

Senate race

Image courtesy of Google.com, Associated Press

"The Republicans have retained enough support in the Senate to still have a lot of sway in shaping a second package, regardless of who ends up in the White House. That may see House Democrats realise that there isn’t much to be gained by stalling until after Inauguration Day in January, so there are reasonable odds that they, and the White House, will move in the direction of a smaller, but politically feasible bill, rather than sticking to the $2 tn+ bill already passed in the House," says Avery Shenfeld, an analyst at CIBC Capital Markets.

In sympathy with heightened volatility, the Pound-to-Euro exchange rate had early on Wednesday rallied to a fresh two-month high on a combination of positive sentiment related to the U.S. election and the status of Brexit trade negotiations.

EU and UK negotiators have on Wednesday ceased talks for a short period and it is expected the EU's Michel Barnier is to brief EU ambassadors at some point on Wednesday while the UK's chief negotiator David Frost will brief Prime Minister Boris Johnson.

Talks are likely to resume in London on Sunday, according to media reports.

Markets have bought Sterling over the course of the past month in the belief that negotiators remain on track to secure a deal by mid-November, with issues such as fishing rights and level playing provisions said to be the remaining areas of disagreement.

There is little visibility on just where the two sides stand on these two crucial issues, with headlines and counter headlines providing a contradictory message for investors.

However, markets themselves tell a story of progress as the rally to a fresh two-month high in the Pound-Euro exchange rate implies an ongoing expectation for a deal to be done.

Bloomberg reports Johnson is now unlikely to speak with European Commission President Ursula von der Leyen this week, as had once been considered, but may do so at the end of next week if a final political push is needed to seal a deal, two people familiar with the discussions said.

Barnier and Michel

Above: Michel Barnier, EU Chief Negotiator and Charles Michel, European Council President, address the media on the matter of trade negotiations following the EU Council Summit. Copyright: European Union

"Officials on both sides say an accord is in sight, and could be reached between Nov. 13 and Nov. 16 -- but they caution that the negotiations could still break down. While the two sides have made progress in recent days toward narrowing their differences over fishing, the level competitive playing field and how any deal will be enforced, they haven’t yet reached an accord," says Ian Wishart at Bloomberg.

The Pound-to-Euro exchange rate rose to a two-month best for Euro buyers on Wednesday when it hit 1.1178 before paring back to 1.1144.

The rise above 1.11 on Wednesday was consistent with a steady grind higher in the exchange rate since mid-September and some technical analysts would say the near-term trend continues to favour Sterling gains. If you are looking for a better exchange rate, we recommend you set an order with your FX provider to avoid disappointment in the event the market turns on bad news. Likewise, you might want to book current levels for use over coming months, see our explainer here.

An EU diplomat told the FT the chances of both sides reaching a trade agreement remained "50-50" - a projection that is at odds with market optimism for a deal to be done. The diplomat said talks on the level playing field conditions for businesses remained "slow", with neither side offering decisive concessions.

"The EU’s chief negotiator is expected to call for more negotiations at today’s briefing with the EU member states. Heightened uncertainty about the future trading relationship between the two regions will continue to weigh on GBP," says Carol Kong, a foreign exchange strategist with CBA.

However, near-term price action in Sterling could be influenced by the U.S. election, with uncertainty looking likely to rise given how tight the result is proving to be.