The Pound has moved lower this morning as increased Brexit uncertainty and market risk aversion continues to weigh on Sterling.
Over the weekend Boris Johnson told the Polish Prime Minister he would be ready to accept moving to “Australia terms” after the transition period ends with the EU should no deal be reached before the end of the year. Most EU-Australia trade follows the World Trade Organisation rules (bar a few specific agreements); so this would essentially be a no deal Brexit. This has led to some Pound weakness.
The deadline for requesting an extension to the transition period is tomorrow and Boris has already clearly stated he would not be making this request. Intensified UK-EU trade talks resume this week and will continue into July. Markets will be closely watching the headlines from these talks, so we expect continued volatility in the Pound over the coming weeks. Although there’s still huge divergence in positions, some analysts feel that the tone of the talks are becoming more conciliatory and that eventually compromises on both sides might be made.
Sterling has also been hit by an increase in risk aversion in the markets as a surge in coronavirus cases in the US has made investors worry that the global economic recovery may be disrupted before it’s even properly got going. Certain southern US States are seeing record daily highs of new cases (partly down to increased testing though) and some States are having to reimpose lockdown restrictions. Although the US is unlikely to go back into full lockdown mode, it’s still likely to be very damaging to their economy. There’s debate about when and if the US Dollar will lose it’s safe haven status should their situation worsen and as other regions of the World continue their recoveries. The Pound generally gets hit when market risk aversion increases due to the UK’s close links to financial services and global investment.
As a result, the GBP/USD has pushed to the lowest levels since the start of June. The GBP/EUR has pushed to a 3-month low with the market breaking below the 1.10 mark. The Euro has made decent gains as the regions recovery from Covid has been going well and the united EU response to the virus has made the single currency more attractive.
This week traders will be keeping an eye on Brexit headlines, US Covid-19 case numbers, the latest US employment figures (Thurs) and UK services (Fri).