IFX Market Report: Tuesday 6th October 2020

Another upbeat morning for the Pound as markets become increasingly confident in a UK-EU post-Brexit trade deal being secured – with many notable banks and financial institutions painting a positive short-term outlook for Sterling.

Tuesday saw cable edge closer to the 1.30 mark – starting the day off at 1.2911, GBPUSD managed to gain impressive ground, closing the day off at 1.2971.

As news on UK-EU relations continued to impact markets, Tuesday was uneventful for GBPEUR. The pair opened at 1.1009 and closed just a shade under at 1.1006.

After numerous reports from a plethora of news outlets suggesting a deal was close, the Pound has gained considerable momentum and continues to sustain itself. At 08:06 GMT cable was able to reach a monthly high and break through the 1.30 mark. This is likely due to the market unpricing unnecessary fears to last month’s events surrounding negotiations – though analysts at Goldman Sachs claim that “the market is still pricing a significant degree of uncertainty into Sterling that is no longer warranted”. The Wall St bank adding in their weekly note to clients “Go long vs Euro as Brexit Deal nears” suggesting that Sterling could enjoy an advantageous October (especially against the single currency) as the signs suggest finally, the UK and European Union are coming to some sort of agreement.

Financial news outlet Reuters also maintain the same attitude towards Sterling. Their analysts claim that market participants “who typically hedge exposure to GBP in a certain direction… have increased demand for GBP… allowing them to gain benefits from any GBP gains over the coming months”. They went on to add that “the only certainty amid the fog surrounding European Union-UK trade talks is that sterling will weaken or strengthen once the fog clears and the outcome of the talks is known”.

Strategists at ING concur that “the reason for GBP’s exacerbated move in positioning compared to the rest of G10 is indeed related to the uncertainty around EU-UK trade negotiations and the Brexit Withdrawal Agreement… the news flow over the past few days has given reason for more optimism that a trade deal will be eventually agreed in the next weeks, so we may see some of this positioning drop being pared back.”

Though Sterling’s current standing is strong, risk is ubiquitous, with investment bank JPMorgan insisting that “There is no denying that sentiment is continuing to build for a positive outcome and while Johnson’s October 15th deadline is fast approaching it does feel that the will is there from both sides to do a deal although this is likely to be a very skinny one. We are feeling a bit more positive on the whole situation but mindful there will continue to be plenty of headline risk in the coming days.”

As for EURUSD, the pair finally saw some price action on Tuesday; the pair opened the day at 1.1727, before spiking and ending the session at 1.1785.

On the data front, a rather quiet day. Aside from speeches from ECB President Christine Lagarde and Fed Chair Jerome Powell in the afternoon, we have the UK’s Construction PMI for September and US’ Balance of Trade for August being released throughout the day.

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