Search
  • Joel

GBP Defying Dominant US Dollar, Here's Why



Its been a good week for USD.


Rising global Covid-19 cases (particularly in Europe) have put risk assets on the back foot and given USD an underlying bid, a reflection of the fact that traders/investors have been downgrading global growth expectations for Q4 this year. Moreover, concerning developments in US policits (Trump hinting he will contest any Biden victory and stimulus talks again ending with nothing) and rising real yields on US government bonds (increasing the incentive to buy USD, as you get a better return if you buy USD and park the money in US government bonds) have also been supporting the dollar this week.


DXY has thus risen to above the 94.50 mark today, having opened the week around 93.00. GBPUSD is lower on the week (a function of USD strength), but in the last two days has defied the dominant dollar and outperformed. Indeed, GBPUSD has remained well supported above 1.2700 and is the best G10 performer today.


How is GBP defying gravity like this?


We have had two major GBP positive developments over the past two days;


1) The UK government has announced a job retention scheme to replace the furlough scheme that was started in response to the pandemic.


In October, the government will stop paying 60% of people’s wages regardless of whether they are at work or not. Instead, they will encourage employers to continue employing people on a part-time basis and if an employee works at least one third of their usual full-time hours, the government will top their earnings up by another third, topping their earnings up to a maximum of two thirds of their usual earnings.


The idea is to keep people in work in industries/sectors which have been temporarily hit by the pandemic and are suffering a temporary reduction in demand/cash flow, rather than preserving all jobs regardless as to whether or not those jobs are ever actually going to come back. The new scheme is reportedly only going to cost the government £500mln per month, compared to the £4bln per month that the furlough scheme has been costing, and is set to last for 6 months.




Unemployment is still set to rise in wake of the winding down of furlough, but the new scheme is being welcomed by the BoE and most economists, an acknowledgement of the fact that the scheme will save many hundreds of thousands of jobs and will support economic growth over the next six month.


Higher expectations for UK economic growth over the next six months = strong GBP


2) The tone of Brexit developments have been improving this week.


EU Brexit Negotiator Barnier, despite reiterating that the UK internal market bill (that is currently being debated in the UK House of Commons) is “unhelpful”, has reportedly claimed that the legislation created an “opening” (not sure what that means, but it must be a good thing!).


Additionally, technical-level negotiations are said to be progressing well, according to sources, who added that Barnier briefed EU27 ministers earlier this week and said there is now a “much more open atmosphere at the negotiating table”.


Furthermore, Barnier reportedly said to have privately said that he is “realistic” that a deal can be achieved, and that “an agreement remains possible in line with the EU's interests and the UK's three red lines.”


So by the sounds of it, momentum towards a deal is growing. If this manifests into some negotiating breakthroughs over the coming weeks, we could see HUGE GBP gains on the back of this


But risk to GBP remain


Communication from the Bank of England regarding negative rates in the UK has been downright confusing, leaving markets pretty much in the lurch; the stance at the bank seems to currently be “we are looking at how to implement them, and they are an option, but just because we are looking at them doesn’t mean we are actually going to use them”. Pretty confusing right?


As a result, though money markets do expect negative UK rates by the end of H1 2021, GBP is certainly vulnerable to the bank communicating its intention to use them with a little more conviction.


Elsewhere, though I have discussed the improving tone of Brexit developments above, we all know how quickly things can change. A no deal end to the transition period is most certainly still a strong possibility, even if momentum to a deal does continue to grow.


A worst case scenario of a no deal, plus negative rates, and we could be seeing GBPUSD back below its pandemic lows around 1.1500. 

Our fundamental course, helps anyone understand them, all curriculum is very much fun, informative and packed with much energy. It will help you transition into an all-round trader, implementing fundamental and technicals to provide the edge when trading.


Click here to get started today!

Copyright © 2020 FreakNetwork All Rights Reserved