The last week has seen increased discussions over the role of the US dollar in the currency markets, with many movements for the pound sterling forecast attributable to movement on the US dollar. As we approach the US election, and the economic and health effects of COVID-19 show no sign of slowing down in the US, the pressure on the US dollar has increased and seen it sold off.
Where typically the US dollar is regarded as a safe haven currency which will appreciate in times of economic uncertainty, that mantle is currently being enjoyed by gold, the price of which has risen to an all-time high this week, at $1944 (that is US dollars).
The money has to flow somewhere and with the US dollar weakening, currently at a two-year low against the Euro and a five-month against the pound, gold has risen and so has the Euro. We have seen a strange situation therefore where the big move on EURUSD exchange rates last week has seen the pound lose ground against a stronger Euro but rise against a weaker US dollar.
Today is a key date to be aware of this trend since we have the latest US Interest Rate decision at 1930 this evening. The latest decision and commentary by the US Federal Reserve bank will be vital to shaping market sentiments on the currency market, and any movements on the greenback may well feed into other currencies including the performance of the pound against not just the US dollar but others too.
What Can we Expect for Sterling Exchange Rates Ahead?
July has been a month of change with based on sentiment towards Coronavirus deteriorating towards the end of this month. Where at the beginning of July there was optimism that Europe was performing well in tackling the virus, the outlook ahead is now less certain with many cases of new infections in Spain, prompting the UK government to impose a two-week quarantine on those returning from Spain to the UK.
We have seen sterling weaker as sentiments on tackling the Coronavirus feed into both the safe haven currencies but also the riskier currencies. This labelling of currencies allows us to identify potential behaviour and responses to certain situations.
In times of low global confidence the havens usually rise, whilst the riskier currencies weaken. And so lately, with fresh uncertainty over the global response to the pandemic, sterling which has been gently edged into this bracket in the last few years, has not received much support.
Looking further ahead, the potential for the pound to weaken further definitely exists with Brexit still to be finalised. Whilst the deadline is technically December 31st for the end of the transitional phase, the market is predicting October is a time for firmer news on the UK’s potential to strike a trade deal with the EU, since this is the last EU Summit before the end of the year within which timescales allow an agreement to be reached.
An agreement between the UK and the EU will once decided upon, will then need to be signed off by the individual members of the European Union, and this could take many weeks. This means the dates of the EU Summit scheduled for October 15th and 16th, less than three months away, could become more of a focal point.
Historically, the last few years tells us these negotiations rarely go smoothly and the pound can remain very sensitive to the news or headlines, rising on any optimism of a deal, whilst falling on any suggestions of a no-deal.
All in all, the pound has many hurdles to overcome ahead but with the default position currently a no-deal Brexit, and many signals the UK economy will only be struggling further ahead in the face of continued uncertainty over Coronavirus, it will take some change in the news and sentiment to drive the pound higher.
That is unless we are talking about individual weakness from another currency, like we are seeing with the GBPUSD level at present. You rarely get a hard, fast rule in the currency markets, the market is a reflection of investors attitudes and sentiments which is ever changing.
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