28 October 2020: Modest Sterling growth after a deal

Modest Sterling growth after a deal

28th October: Highlights

  • Ten weeks to go and a deal still 50/50
  • Confidence falling as cases grow
  • Slowing economy no surprise as virus concerns grow

Brexit risk to the downside

With just ten weeks to go until the UK becomes just another trading partner of the EU, the prospect of that departure being on trading terms agreed by both parties remains very much in the balance.

It is difficult to remember a time when Brexit wasn’t a major part of the political and economic landscape and looking back it effectively destroyed the career of one Prime Minister and demolished the election hopes of an entire Party, consigning both to the wilderness.

Brexit should never have been a Party-Political issue. Both main Parties had as many leavers and remainers as the other yet although there were several free votes last winter MPs were expected to vote as their Party expected or run the risk of ruining their own career.

2020 was supposed to be the year of transition where the nuts and bolts of Brexit were agreed but with the UK’s Internal Market Bill contradicting the terms agreed by the two sides, trust has been severely weakened and a no-deal departure remains a possibility although less likely now.

A definite case of Brexit fatigue has developed throughout the country as the Covid Pandemic has focussed attention elsewhere.

The financial markets still believe a deal will be done and the risk is now very much down the downside should one not be completed. The upside for Sterling is limited as the economic effect of the partial lockdowns taking place far outweigh Brexit in the short-term.

New cases are growing at an average rate of more than 22k per day and yesterday saw the highest one-day death toll since May. It has been said many times before over the course of the past eight months, but the next few weeks are crucial as the measures that are now in place try to stem the rising tide.

Yesterday, the pound remained between the 1.3080/1.3000 points that have now become well established. It closed at 1.3045 as traders strive to extract some idea of future trends.

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Only ten States matter, and Trump catching up

It may be no more than propaganda released by pro-Trump media, but the feeling is growing that Donald Trump retains a serious chance of serving a second term as President once the election takes place next week.

No one can doubt that Trump is putting the necessary effort to claw back the initiative from Joe Biden who has run an efficient but hardly charismatic campaign.

Trump’s charisma revolves around insult, bluster and self-congratulation When stripped back, his destruction of the working relationship the U.S. had with China, the huge increase in borrowing essentially to fund a tax cut for the sections of the country that least need it and his playing down of a Pandemic that has taken the lives of more than 220k of the citizens he swore to protect brings into the question his right to serve again.

Both candidates’ activity grows more frenetic almost by the hour.

Trump seems determined to make every possible effort to win Pennsylvania and attended three rallies there yesterday. In that same state there was another incident of violence between the police and an African American man who was shot and killed sparking further questions over black lives matter.

Biden meanwhile visited Georgia, a staunchly Republican State, where he is incredibly ahead in the polls. If Biden wins Georgia, Trump stands no chance of a second term.

The economy is about people’s lives and their standard of living but has been broken down into little more than a series of soundbites by the President as the continued back and forth over a relief bill continues. It is becoming less likely that an agreement will be reached before next Tuesday as the will, particularly on the side of the Administration, to get a deal done seems to be draining away.

If Biden wins and Trump becomes a lame duck. It will become ever more difficult for a Relief Bill to be passed before Biden takes control.

Yesterday, the dollar index remained in its current range as market activity winds down ahead of the election. Next week is likely to be as volatile as this week has become passive. The index fell to a low of 92.78 matching the previous day but climbed back to finish virtually unchanged at 93.03.

Full recovery may require drastic long-term actions

Yesterday marked a significant increase in the cases of Coronavirus across the entire EU as Italy revealed record numbers, and France considers a total lockdown for a month to stem the flow. Italy also reported over 200 fatalities for the first time since May

The spread of the virus does not have an epicentre as it did when it first broke out with the region seemingly being assailed from all sides.

The economic effect of the second wave could outstrip the effect of the first and again the EU commission is likely to be found wanting when it comes to a consolidated response. Brussels does not have the authority to sanction any form of region-wide lockdown, relying on individual nations to act in the correct manner.

Italy has again become the focus of unrest over the Government’s handling of the crisis. There were riots in several cities as data for tourism showed just how parlous the state of the Italian economy is.

In the industrial north of the country, the rioting was worst in Milan and Turin as citizens realized that the sacrifices made earlier in the year appear to count for nothing as the country stands on the edge of a precipice both socially and economically.

Across the entire tourism sector which encompasses the whole of the EU but especially Spain, Greece and Italy, the loss of revenue is close to Eur 750 billion while investment on the sector has almost completely dried up.

It is entirely possible that the borders will again be closed to stem the rising tide of infections, but that horse may have already bolted given the rising level of infections.

If France is forced to lock down nationally, questions are sure to be asked of Emmanuel Macron and his Ministers about why they didn’t act sooner. This could prove to be a question asked across the whole of the EU as lessons haven’t been learned.

In company with the rest of the major currencies, the Euro trod water yesterday, trading between 1.1838 and 1.1792 closing at 1.1795.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”