Sterling just sitting on the fence

Currency

Good Morning, after a week dominated by rumour and counter rumour, sterling ended up slightly stronger as investors became optimistic that at least both sides of The Channel were back talking.

Some in the market took the view that the politicking early in the week was at best “a third-rate, will-they-won’t-they melodrama, in which a knowing audience in Brussels and London opened and ahead, safe in the knowledge that the two sides would ultimately return to the table — if only to avoid taking the blame for failure”.

Sterling is now hovering just above the middle of its trading range reflecting the consensus that there is a slightly better than 50:50 chance of both sides breaking the deadlock. Apart from Brexit, the American election, in just over a week’s time, looms large over the world’s financial markets and despite President Trump’s better showing in last week’s debate, commentators are wondering if it is too little too late and continue to predict a blue wave. If a blue wave does indeed sweep Biden to power and give him control of both houses, the dollar could fall further in the aftermath of the election as he is broadly perceived as anti-business.

The week ahead is again going to dominated by the US elections and currencies will be buffeted by the changes in risk sentiment caused by it. Brexit is still uppermost in the thoughts of both sterling and euro traders, and we will spend the week yet again, watching the headlines. As we are becoming sadly accustomed to COVID-19 and its destructive grasp on the world economies, this is a resurgent danger that the markets must watch. With the ECB setting the pace this week, Central Banks are sure to continue to offer unlimited help and resource in addition to most governments continuing to do the same to support businesses, but increasingly the question will be who and how will it all be paid for?

UK
As the UK government celebrated the signing of an all-encompassing trade deal with Japan (having settled the Stilton war) the larger matter of a trade agreement with Europe appears to be edging forward after the resuming of talks last Thursday. There is now a cautious optimism over these negotiations after Michel Barnier extended talks into this week and President Macron appears to be softening his stance regarding fishing. However, the continuation of the talks is fully priced into sterling as are the chances of a satisfactory outcome, consequently the danger now lies in an “unstaged” breakdown in the talks which would see sterling fall sharply. We will be watching domestic developments particularly on the containment of COVID-19. With next to nothing on the data front this week, sterling is again most likely to be driven by the dollar switches in risk sentiment.

Euro
The euro, assuming an absence of Brexit news, will be overshadowed by COVID-19 and thoughts about this Thursday’s meeting of the ECB. With last week’s release of disappointing Purchasing Managers Indices, ECB President Christine Lagarde is expected to deliver a dovish message hinting at further quantitative easing in December. The euro may also gyrate more this week against the dollar as it is the largest and most liquid currency pair in the world of FX. Consequently, it is also the most sensitive to changes in risk assessments over the upcoming US election. On the data front, we will be watching for the release of further information regarding confidence starting with the German ifo data today. This data is followed by European consumer confidence and September’s German Consumer Price Index (CPI) on Thursday. The week closes with European CPI and third-quarter GDP.

US
The dollar spent last week reacting to rumours over the likelihood of a stimulus bill being passed, which at the end of the week didn’t seem any closer than at the start. The longer this stimulus is withheld, the more the damage to the economy will continue, and with COVID-19 surging towards 85,000 daily cases, the need for economic help is growing. With just over a week until the polls in the US election, the market has been broadly selling dollars in expectation of a win for Joe Biden. Despite over 50 million votes already being cast, there does remain a ray of hope, amongst his supporters, that Donald Trump can triumph in a repeat of the last election when he trailed Hilary Clinton in the polls. The Trump team will be partly pinning its hopes on this Thursday’s release of third-quarter GDP which should see a huge recovery and embolden his claims of his economic prowess at the White House.

Scandi
The krona had a very quiet week despite the political uncertainty hanging over it. The pound strengthened modestly against the krona, mainly on the back of the restart in Brexit talks more than anything impacting the Swedish currency. With schools closed for half-term this week, most political commentators do not believe any major domestic breakthroughs will be made and that the uncertainty will spill over into November. This week we will be keeping a close eye on the trade balance and the latest household lending figures out on Tuesday. An important economic tendency survey is released on Wednesday and the latest retail sales figures as well. The latter is expected to have remained stagnant on a month-by-month basis.
Over in Norway, a growing number of COVID-19 cases has seen the government impose tougher restrictions. Just like its big brother, the krone had a very quiet week and was range-bound. The most important data release this week in Norway will be Friday’s unemployment rate which is expected to have decreased to 3.5% from 3.7% on a month-by-month basis.

ROW
The Japanese yen will remain the main beneficiary of any fallout from the US election especially if it looks like it is going to be a contested result. The new Japanese Prime Minister, Yoshihide Suga, is due to address parliament today but it is unlikely he will announce anything to move the markets. Elsewhere, with little out on the data front apart from third-quarter inflation figures on Wednesday the Australian dollar will remain vulnerable to any further protectionist moves by Beijing. Apart from the policy meeting of the Bank of Canada on Wednesday, the week looks quiet for the loonie and its movement will most likely be dominated by the likely outcome of the US election.

Question
Why do the clocks change?
The Germans were the first to implement the idea in 1916 during the First World War, in the hope, it would improve productivity in their war economy by saving coal. Britain and most of its allies soon adopted the concept. Once the war was over, most countries abandoned Daylight Saving Time (DST), except for Canada, the UK, France, Ireland, and the United States. The rationale is to put clocks back every year heading into winter to allow people an extra hour of daylight after work. This was the original idea first originated by George Hudson, an entomologist and astronomer, who invented modern DST and proposed it in 1895. He was a British-born New Zealander who wanted to allow himself an extra hour of sunlight in the evening to collect insects!