- GBP/USD vulnerable as second UK lockdown, U.S. election loom
- Economy to slump again on 2nd shutdown
- Trump catches up in polls in some key battleground states
- Bank of England, Fed decision & U.S. payrolls dominate calendar
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- GBP/USD spot rate at time of writing: 1.2905
- Bank transfer rate (indicative guide): 1.2553-1.2644
- FX specialist providers (indicative guide): 1.2712-1.2789
- More information on FX specialist rates here
The Pound-to-Dollar exchange rate fell at the start of the new week and could be destined for further falls as President Donald Trump closes the gap with his opponent in opinion polls and markets adjust for a new UK economic slump following the government's weekend decision to place the country into a second lockdown.
Sterling had been benefiting of late from positive developments concerning post-Brexit trade talks between the EU and UK, however there is a risk that the lockdown now trumps these developments and impinges a new negative outlook on the UK currency.
"I am afraid that no responsible PM can ignore the message of those figures," Prime Minister Boris Johnson said in a Saturday statement, before announcing that England would return to lockdown from Thursday 05 November to at least Wednesday 02 December. "Models as you’ve just seen now suggest that unless we act we could see deaths in this country running at several thousand a day. A peak of mortality alas far bigger than the one we saw in April."
Prime Minister Johnson said Saturday that 'non-essential' businesses will close from Thursday, leaving just supermarkets, takeaway food and a handful of other outlets open as England joins others in the United Kingdom and major European counterparts in shutting up shop a second time.
Above: GBP/USD at hourly intervals alongside Dollar Index (black line, left axis). Lock in today's rate for use over coming months to protect your international payments budget from heightened volatility, learn more here.
"GBP/USD has eroded the near term uptrend at 1.2928 and in doing so shifted the pattern to a more negative one. Below the uptrend lies the 1.2814 June high. Failure here is expected and will target 1.2706, the 200 day ma, then 1.2445 and 1.2250/00," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who's a seller of the Pound from 1.2955. "Rallies are likely to find initial resistance at 55 day ma at 1.3010."
Europe's shutdowns wounded the Euro and stock markets while lifting the Dollar last week, so Downing Street's announcement could encourage some investors to keep betting against the Pound.
"A new nationwide lockdown after a bizarre U-turn by Boris Johnson, unsolved Brexit negotiations and a clear disinflationary vibe despite an already very weak GBP," says Martin Enlund, chief FX strategist at Nordea Markets. "GBP could be in for a rough ride."
The U.S. election nevertheless remains the highlight for financial markets this week, and news President Donald Trump could to be closing the gap between himself and Joe Biden in some key battleground states will keep nerves elevated.
A Dollar rebound and losses for the Pound might be especially likely if either President Donald Trump clinches a surprise win in this Tuesday's election or if a victory by opposition Democratic Party candidate Joe Biden turns out to be less positive for the stock markets than investors have anticipated.
Trump was said to be ahead in Iowa, while other reports suggested early voting in Florida, North Carolina and Nevada may have favoured the incumbent. More than 90 million ballots are already believed to have been cast in early voting, which is nearly two thirds of eligible voters.
This, according to consensus thinking, makes a contested election, heightened uncertainty and a rebound in the safe-haven Dollar more likely for the weeks ahead. Just as the backdrop for Sterling turns negative again on the charts.
"The S&P 500 is down 5.4% this week as we write so in that context the gain for the US dollar is quite modest. We believe this reflects the view that the dollar will weaken on a Biden victory next week – the current consensus thinking," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. "A shock Trump victory and/or the Republicans maintaining control of the Senate will likely be required to reinforce the USD’s upward momentum in the week ahead."
Pollsters, analysts and investors favour a Democratic Party 'clean sweep' of both houses of Congress that would see the opposition govern unfettered, passing spending bills and enacting new regulatory agendas at will.
"Bettors are much more optimistic on Trumps behalf than most PhD modellers. Are markets dumb or not? We will see this week. We favour USD longs into the election with rising restrictions in Europe and a potential scope for lengthy lockdowns," Nordea's Enlund says.
Above: GBP/USD shows inconclusive correlation with large changes in support for Joe Biden.
A clean sweep is expected to weigh further on the Dollar but also lift the stock markets that Sterling has a positive correlation with. Not everybody agrees however, that a Biden win would be positive for stocks or Sterling.
"We are not convinced that a Democratic Party “clean sweep” outcome in the US election guarantees a risk-on response. The optimistic view requires a selective approach to the Democratic election manifesto, ignoring the headwinds to risk appetite that higher corporate taxes and heightened regulation of tech might bring," says Daragh Maher, U.S. head of FX strategy at HSBC.
A contested election is the last outcome that investors would want to see given that it could lead to weeks of wrangling in the Supreme Court so if investor unease over the outcome of the vote grows enough to weigh further on stock markets, it could add to Sterling's vulnerability this week.
Voting takes place on Tuesday and although state level results are expected to begin trickling in overnight and into Wednesday, the overall result and winner may not be confirmed for days or even weeks after the election given the unprecedented number of mail-in votes cast this time around.
The resulting uncertainty, especially if exit polls show the race to be tight, would be a fertile environment for a Dollar rebound and more protracted weakness in the Pound-to-Dollar rate.
"GBP bulls may hope risk appetite drives further upside to GBP-USD should the US election return a “clean sweep” for the Democrats. We disagree," Maher says. "We continue to anticipate GBP weakness not simply because the Brexit clock is ticking ever louder, but also because cyclical challenges are mounting."
In 2016 the most widely publicised polls proved wrong and the result was a five percent Dollar Index rally between early November 2016 and year-end. Few have seriously entertained the idea a repeat performance this year.
Above: Pound-to-Dollar rate shown at weekly intervals alongside Dollar Index (black line, left axis).
"The data highlight will be nonfarm payrolls on Friday, which we forecast to have expanded in October by only 400,000. Other items of note include the ISM manufacturing and services surveys, which both look to have remained at still-solid levels" says Michelle Girard, global co-head of economics at Natwest Markets. "We expect next week’s FOMC meeting to be fairly uneventful."
With European shutdowns and the U.S. election aside, investor attention will also be divided between Thursday's 12:00 BoE decision, the 19:00 Federal Reserve (Fed) decision and Friday's 13:30 non-farm payrolls report. Thursday's Bank of England (BoE) monetary policy statement and quarterly policy report will be scrutinised closely given the bank had already been expected to increase its quantitative easing target and as a result of its newfound interest in negative interest rates.
"With the BoE's QE envelope set to be reached in early December and the economic outlook deteriorating we expect the BoE to authorise more monetary stimulus at its meeting next week. £100bn can be easily justified in our view," says Robert Wood, an economist at BofA Global Research. "QE delivers little extra stimulus at this stage, when the tricky outlook requires it we think....In a nearly bare cupboard negative rates seem to be all the BoE can find. We think they will remain a feature of the UK debate."
The BoE is actively contemplating the technicalities of cutting Bank Rate below zero, having asked commercial banks for information on how they'd go about implementing a negative interest rate policy, and has occasionally inspired weakness in the Pound with public discussion of the matter. The decision is out at 12:00 pm London time on Thursday and will come alongside the latest quarterly inflation report containing the BoE's latest forecasts for the economy.
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