23/10 – Stimulus doubts creeping back into market psyche

GBP: Sterling starts to consolidate

EUR: Can push higher

USD: Stimulus miss will see USD strengthen

Sterling

Sterling has fallen back from its overbought levels on Wednesday as maybe a little circumspection came back into markets. While it cannot be ignored that the noises between UK and EU negotiators are the most positive for maybe 8 months, it is just noise at the moment and sterling may have to wait on something concrete before making a significant move higher from here.

Sterling has not reacted too much to this morning’s retail sales announcement. Growth in the retail sector continued in September but concerns will also be increasing as to the hardiness of this sector through what is shaping up to be a dark winter for the UK economy as a whole. Food store growth is expected to remain strong with consumers likely to overspend on the upcoming festive season as a treat to themselves after a tough year, especially in areas wherein bars and restaurants are closed or closing to due to new covid-19 lockdown measures.

The elephant in the room remains just how strong consumers can be in an economy that sees those without work or the ability to work with less cash in their pockets as a result of the end of the initial furlough scheme. The government’s improved offer is a start but will still leave a lot of people, through no fault of their own, with very little to live on through this winter.

Euro

Rising coronavirus cases remain a concern for the European economy moving forward and we expect today’s PMI figures to show that but we believe that EURUSD strength will continue into 2021 as additional local stimulus puts Europe at the vanguard of global growth in a post-Covid world.

US Dollar

The dollar is a little stronger this morning as doubts over the prospects of stimulus creep back into the wider narrative. With some Republican senators making it very clear that they will not vote for the stimulus deal, we are now hearing from Democratic House members that are they are also unlikely to back a deal before the election in 11 days’ time.

As we have noted before, we view this to be more important in the short term than the election for the USD.

Last night’s Presidential debate has not tipped the needle one way or the other but we have seen an interesting trend in odds markets with the betting money swinging towards Trump in the same way as it did in 2016 and before the Brexit referendum, in contrast to the polling. Those of you who joined our webinar on Wednesday will know that we are not confident in the prospects of a Democratic sweep of the election and think there will be a surprise or two come election night.

Elsewhere

As noted yesterday, currencies that had been brought higher by a weak USD remained subject to poor data locally and that has happened overnight to the NZD, brought lower by a slower than expected inflation number. Such weakness will only add strength to the wider belief that the Reserve Bank of New Zealand will need to cut rates again soon.

Have a great day and a better weekend

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Jeremy Thomson-Cook

Jeremy Thomson-Cook

Jeremy has over 13 years experience working in the FX industry. As a specialist in political risk mitigation and currency hedging, he regularly advises clients on the day-to-day moves of the markets and the implications of fiscal and monetary policy on international businesses.