-GBP/USD recovery survives Trump virus shock, Brexit volatility.
-Charts point back above 1.30 but downside risk abounds for GBP.
-USD rebounds as Trump’s illness stokes U.S. election uncertainty.
Official White House Photo by Tia Dufour
- GBP/USD spot rate at time of writing: 1.2931
- Bank transfer rate (indicative guide): 1.2583-1.2674
- FX specialist providers (indicative guide): 1.2742-1.2820
- More information on FX specialist rates here
The Pound-to-Dollar exchange rate recovered further lost ground last week but is still susceptible to adverse Brexit headlines and could also face downside risks amid fears for the health of President Donald Trump over the coming days.
President Trump is battling against the coronavirus after testing positive for it on Friday, threatening markets with weeks of uncertainty about whether he'll be able to compete in November’s election.
“The dollar remains in recent ranges in a consolidation phase and we see that as likely to continue,” says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. “The hopes of a fiscal stimulus package have evaporated and we have now had the announcement that President Trump has tested positive for COVID-19. So we remain of the view that the dollar will be well supported within the 1.1600-1.2000 EUR/USD range with a test to the downside more likely. “
In late March and April when Prime Minister Boris Johnson contracted the virus it took a full 10 days for his condition to deteriorate to the point where he required intensive hospital care so it may be as long or longer before markets know the extent to which it’ll impact the 74-year old President, who’s a member of one of the highest risk groups.
Friday’s revelation sank stock markets and lifted the greenback but didn't prevent Sterling from rising amid a perceived ebbing of ‘no deal ‘ Brexit risk.
“The health of the US President and the outlook for the US elections could continue to dominate the price action in the G10 FX markets in the near term,” says Valentin Marinov, head of FX strategy at Credit Agricole CIB. “In addition, next week’s US data could highlight that the US economy continues to recover and thus should keep at bay any talk of further Fed easing from here, even if, as we think, a fiscal stimulus deal remains elusive.”
With less than a month to go betting market-implied odds of a Democratic Party election victory have risen with demand for the safe-haven Dollar and could continue to until investors can be sure that Trump can still participate.
"The President was first diagnosed with COVID-19 on the evening of Thursday, October 01 and had received Regeron's antibody cocktail on Friday, October 2nd," Trump's physician said on Saturday, after earlier describing him as "doing very well...not requiring any supplemental oxygen...resting comfortably."
He's also receiving Remdesivir, an experiemental drug developed by the U.S.-headquartered, NASDAQ-listed Gilead Sciences.
"It's fair to say Washington and the country at large is still very much scrambling to grasp the full consequence of this dramatic moment, which has landed with just over 31 days left until the November 3 election," reports Jacob Greber, a Washington-based correspondent for the Australian Financial Review. "Trump may well sail through this without any negative health consequences, which would just prove to his supporters what a resilient 74-year-old he is. But he also may not, tipping America into an unprecedented leadership and constitutional crisis, kicking an already unhinged year into a bottomless abyss."
Above: Pound-to-Dollar rate shown at hourly intervals alongside S&P 500 futures (green line, left axis).
Wednesday's vice presidential debate is the main event for election-watchers but updates on Trump's health might have more impact on markets, especially if it deteriorates to the extent where he can't participate in the election.
This might ask questions about the sustainability of the Dollar's negative correlation with the U.S. stock market and Sterling's positive relationship with it.
There's widespread agreement among analysts that a Democratic Party presidency would be a Dollar-negative outcome given Joe Biden's China-friendly stance, but his onerous agendas on taxes and regulation coupled with the Democrats' growing contingent of 'socialists' could hardly be welcomed by the stock markets. In other words, the above correlations might be susceptible to at least a period of interruption in a post-Trump world.
“We continue to look for stronger evidence we are in the process of establishing a more important base following its successful defence of our key downside objective at 1.2720/1.2655. Key resistance stays seen starting at 1.2953 and stretching up to 1.3007 – the mid -September highs and 55 -day average,” says David Sneddon, head of technical analysis at Credit Suisse.
Sneddon says the Pound needs to overcome the 1.3007 level on a daily closing basis to complete a technical “base” that looks to have been forming on the charts through September, which would then create scope for a return toward late August highs near 1.35.
Above: GBP/USD at daily intervals with S&P 500 futures (green line, left axis), Fibonacci retracements of March recovery
“Should the market fail in the 1.3000/70 zone, we would expect to see further losses to 1.2445 and then 1.2250/00,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who's looking for a retest of 1.30 and potentially a move up to 1.3070.
Jones bought the Pound-to-Dollar rate at 1.2820 in September but intends to walk away from the trade when the market reaches 1.3050.
"BREXIT news ebbed-and-flowed over the past week, although the rally in the pound clearly implies the market is sensing a deal," says James McCormick, global head of desk strategy at Natwest Markets.
Sterling has been trading in a 1.27-to-1.30 range and was boosted Friday when political leaders instructed Brexit negotiators to work more intensively to bridge remaining differences in the trade negotiations.
There had been fears that either the EU or UK could walk away from the table if a deal had not come together by October and if EU objections to the Internal Market Bill remained unaddressed, but the two sides are now expected to continue talking beyond a self-imposed mid-month deadline if necessary.
“We remain highly skeptical of apparent progress/breakthroughs in negotiations as the two sides remain far apart on key issues with less than two weeks to go until the Oct 15-16 EU leaders’ summit. Brexit headlines will remain the main trigger for GBP price swings in the near term,” says Shaun Osborne, chief FX strategist at Scotiabank. “A close today above its 21-day MA of 1.2896 would be the first in four weeks and could signal further gains. On the weekly charts its 200-week MA at 1.2935 will stand as resistance."
Above: Pound-to-Dollar rate shown at weekly intervals with Dollar Index (green line, left axis).
The Pound-to-Dollar rate was unable to get past its 200-week moving-average at 1.2935 last week and could be susceptible over the coming days to both adverse Brexit headlines as well as those relating to President Trump’s health.
“The early signs are that a big lead for the Democrats is seen as reducing the risk of a contested election, supporting risk assets and gently weighing on the dollar. Any Republican comeback could reverse this trend,” says Chris Turner, global head of markets and regional head of research at ING. “While the outlook for GBP does not look negative for next week, we continue to see the GBP pay off as asymmetric, skewed to larger losses should the trade negotiations fail vs limited gains should a light trade deal be agreed.”
With updates on Trump’s health condition and Brexit aside, Sterling and the Dollar will take direction this week from a Tuesday speech by Federal Reserve Chairman Jerome Powell that will focus on the U.S. economic outlook and a Thursday address from Bank of England Governor Andrew Bailey.
Tuesday’s 15:00 Institute for Supply Management (ISM) services PMI will also be scrutinised for clues on the health of the U.S. economy in September, while Friday’s August GDP data from the UK will also be in focus.
“The August GDP reading will be an important one for the Bank, if it is to meet its 20% q-o-q projection. Yes, spending has continued to rise into August. But the pace of rising activity has slowed,” says Sanjay Raja, an economist at Deutsche Bank. “The Chancellor's Eat Out to Help Out Scheme will likely prop up GDP by around 2.5% alone through a boost to food & accommodation activity. Other service industries, however, will likely show a drop in growth...All told, this should see August GDP rise by around 4.1% m-o-m, bringing the UK economy to just around 92% of its pre-virus levels.”