STERLING CLIMBS ON POST-BREXIT TRADE DEAL HOPES
The GBP/EUR rate nearly touched the 1.11 level yesterday with the day high just sitting below that point. This is following some more potentially positive rhetoric coming out of talks between the EU & UK with the prospect of a deal before the end of the year once again looking likely. There will be a two week holiday at the start of August for the Brexit negation teams so there won’t be any face to face meetings taking place, however this doesn’t mean something might be said that could move the markets.
There has also been an indication into post EU life as the UK and Japan appear to be close to agreeing a trade deal. From reports there has been small differences close to the end of talks, however there should be a deal to sign shortly which could provide sterling with a much needed boost. The deal is thought to be worth just over £16bn in trade and could add a boost of £1.6bn to the UK economy. Interestingly these talks have been taking place since the start of June, whilst there is also talks going on with several nations around the world. There is clear evidence from the UK Government that they are planning to have deals in place come the UK leaving the EU.
The past two days the GBP/EUR rate has sat just below the 1.11 level poised to potentially cross the threshold. This morning the rate starts closer than the past two days so there could be a prospect of the barrier being broken. If you’re looking at purchasing euros a jump above the 1.11 would be a 10-day high and present a good window of opportunity. Next week the Bank of England will release the latest Interest Rate Decision and we will also hear from Governor Andy Haldane so that could generate some market volatility.
LATEST EUROZONE GDP FIGURES COULD CAUSE VOLATILITY FOR THE EURO
Today will be a significant day of data for the EU as we expect to see the latest Gross Domestic Product data along with the Consumer Price Index data. The GDP data is forecast to show a fall of 12% from the previous quarter and the year on year -14.5%. However, the year on year CPI data is expected to show a small increase to 0.2% for July. If the readings do perform better than the forecast then there could well be a boost for the Euro however anything below expectations could have the opposite effect.
Many of the EU countries much like the UK have been hit incredibly hard following the pandemic. The northern countries in the EU are showing signs of the economies bouncing back as their manufacturing and production can return to normal. However the southern economies which rely on tourism are unlikely to see returns to previous levels anytime soon. Whilst tourists from the UK especially can still travel to the likes of Spain and Portugal the newly imposed quarantine rules could stop many from going. Portugal will have lost its main industry for the whole of summer and when the following months GDP figures are released, the damage to the economy will be clear.
The EU nations had agreed on a stimulus package earlier this month to help support the economies with both grants and low interest loans, which was received well by the markets but these funds will not become available until January next year which may be too late for many businesses. The euro has been strong in the past few months potentially due to US dollar concern, with the euro being the second most traded currency in the world. It will be interesting in the coming months if that will still be the case.
US DOLLAR SLUMPS AS THE US ECONOMY SUFFERS DUE TO THE CORONAVIRUS PANDEMIC
The GBP/USD rate broke the 1.31 which is the first time since early February yesterday. The US dollar has continued to struggle since the United States became the epicentre of the Coronavirus pandemic. A quarter of the world’s cases have been in the US with nearly all of them on the East coast. The States are still recording over 50,000 cases a day which is down from the highs above 70,000 only a week ago.
The US dollar over the past few years had been soaring as the economy reached new highs and unemployment levels moved into record low territory. However it now appears to all be crashing down with a bang, Starbucks for example reported their first quarterly loss in 7 years. The US equivalent of the UK furlough scheme is also set to ruffle feathers as the Democrats want a $3tn package and the Republicans a $1tn currently, Americans are receiving $600 from emergency jobless benefits. However from September the Republicans want to see this fall to $200.
The main concern for Republicans is they’re trying to protect the economy 100 days out from the next election. Normally politicians are going out trying to win voters selling economic prosperity however they’re essentially going to be telling people we can’t afford to help you as much anymore. This is not a good campaign for Donald Trump to be trying to win re-election from. The fact Trump is double digits behind in the polls will raise concern for financial markets.
Yesterday President Trump suggested there should be a delay to the US Election due to the risks surrounding postal vote fraud, however it is worth noting there is no evidence of this to ever have been the case. Trump if he knew he was going to win would never call for a delay, so this is a key indicator. The US dollar has already given up 7 cents this month against a weak sterling and the concerns for the US economically have only just started.