- GBP/USD is on the backfoot but off its worst levels as hopes of Brexit buoys the pound.
- Greenback firms on risk-off flows as COVID-19 sweeps across Europe and ahead of US election uncertainty.
At the time of writing, GBP/USD trades off its worst levels at 1.2989 and between a range of 1.1916 and 1.3064, down some 0.4% following a resurgence in both the coronavirus spread and the greenback’s safe-haven allure.
The British pound lost as much as 1% vs the greenback on Wednesday when investors ran for cover, fearing the risk of a sharp pullback in the rate of the global recovery and risk aversion in financial markets.
The resurgence of COVID-19 cases in Europe, as well as the US, could not have come at the worst time when considering the uncertainties pertaining to the next week’s US presidential election.
The rate of the deaths in Europe rose almost 40% in a week, challenging the narrative that the virus is relatively harmless that had encouraged an easing of lockdown measures for the sake of local economies.
UK expected to impose Tier 3 restrictions
Both Germany and France are preparing to announce new lockdown measures, following similar moves by Italy and Spain and the UK is now also expected to impose Tier 3 restrictions.
The Scientific Advisory Group for Emergencies (Sage) has predicted that Covid-19 cases across the country will soon have “succeeded the levels in areas already in the highest category” of restrictions, the Daily Mirror reports.
A government source told the paper the latest Sage numbers are “utterly bleak” and suggest that 25,000 people could be hospitalised by the end of November, a higher figure than during the pandemic’s first peak.
It was one of the government’s scientific advisors, Mark Walport, told BBC Radio 4 that without such measures, it was “not unrealistic” that there would be that many people in hospital with covid-19 by the end of next month – higher than the peak of 19,849 on 12 April.
Brexit and BoE in focus
Meanwhile, sterling has otherwise been driven by Brexit developments in the past few weeks.
Britain and the European Union have just over two months to reach a trade agreement before the status-quo transition period ends on December 31st.
The EU’s chief negotiator, Michel Barnier, is in London for negotiations, after which the talks will continue in Brussels and the word on the street is the negotiators made progress this week toward resolving some of the biggest disagreements.
The sentiment is raising hopes that a deal could be reached by early November, according to people familiar with the discussions.
”The two sides have begun work on the text of an agreement on the level competitive playing field, and are close to finalizing a joint document covering state aid, said the people, who asked not to be identified because they weren’t authorized to speak publicly. The UK and EU have also moved closer to deciding essential aspects of how any accord will be enforced, the people added,” Bloomberg reported.
GBP is temporarily navigating some calmer waters as a result as talks continue, However, as soon as the new deadlines approach, GBP volatility will peak up again and a more neutral CFTC positioning is another factor that would likely weigh on an overly-complacent sterling market.
Meanwhile, the Bank of England has been tipped to go negative. However, this is already being partly priced in by the market.
Therefore, such action from the BoE action would not come as a complete surprise. So, at this stage, the negative rate effect could actually be of secondary importance for GBP than the shock of Brexit.