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British pound holding firm as investors relax over Brexit

Pound Sterling (GBP) has recovered some ground on Tuesday after slipping on Monday due to investor concern over the lack of progress made in Brexit negotiations between the UK and the EU.

There was also an underlying nervous tone in sentiment towards UK fundamentals which saw the pound (GBP) struggle for direction in yesterday’s trading session.

However, Sterling traders appear to be loosening up over Brexit trade talks, as the risks priced into the options market today are relatively moderate given that the transition period deadline is fast approaching.

Both the pound to euro (GBP/EUR) exchange rate and the pound to US dollar (GBP/USD) exchange rate are rallying in the London session, reclaiming Monday’s losses.

Mixed currency

Investors occupying a wait and see approach

Indecision continues to dominate currency markets on Tuesday, with investors waiting for further rhetoric from central bank officials later on in the week.

After the US dollar (USD) showed signs of life on Monday, it has depreciated on Tuesday following a successful phone call between US and China trade officials, which boosted risk sentiment.

Meanwhile, the downward pressure on pound Sterling (GBP) is alleviating as GBP traders shrug off Brexit woes. According to some analysts, the UK currency could edge higher if the Confederation of British Industry’s (CBI) monthly retail sales numbers for August, which are expected later today, are optimistic.

But with little scheduled in the economic calendar, we expect price action to remain choppy until the Jackson Hole Symposium on Thursday where all eyes will be firmly fixed on US Federal Reserve (Fed) Chair Jerome Powell’s statement on US monetary policy.

Fed Chair Powell will speak in a virtual version of the Jackson Hole, Wyoming conference and is expected to outline the measures that the central bank will take to push inflation levels higher, which will be an essential development for the direction of the US dollar (USD).

Bank of England (BoE) Governor Andrew Bailey will address an audience on Friday, which could see the pound (GBP) come under fire if he is overly dovish about Britain’s framework.

Elsewhere, investors will be focusing on month-end flows which for now, are supportive of the British pound (GBP), particularly against the greenback due to the currency’s performance rankings over the last month.

US Dollars

US dollar woes building in currency markets

US dollar-based exchange rates are under pressure on Tuesday amid the buoyant risk-on mood in currency markets.

At the time of writing, the US dollar to euro (USD/EUR) exchange rate is trading 0.3% lower at EUR 0.845, while the pound to US dollar (GBP/USD) exchange rate is 0.5% higher at USD 1.3135.

A sell-off in the greenback against riskier assets was boosted by a Financial Times report which revealed that US President Donald Trump is considering fast-tracking approval for a UK COVID-19 vaccine before the November presidential elections.

President Trump also authorised the US Food and Drug Administration (FDA) to allow doctors to use blood plasma from recovered COVID-19 patients as a coronavirus treatment.

Renewed vaccine hopes has lifted a host of major currencies over the US dollar (USD), including the Australian dollar (AUD) which is trading 0.2% higher against the greenback at USD 0.7181.

The Chinese yuan (CNY) and the New Zealand dollar (NZD) are also firmer against the American currency, which is only up against the Japanese yen (JPY). At the time of writing, the US dollar to Japanese yen (USD/JPY) exchange rate is trading 0.4% higher at JPY 106.4635.

However, there is some upside risk ahead for the greenback if Fed Chair Powell disappoints investors dovish expectations, which will likely limit any further downside potential in US dollar-based exchange rates.

Coronavirus cases in Europe

Euro exchange rates steady despite growing coronavirus cases

The euro (EUR) struck higher against its risk-off counterparts on Monday, benefiting from the shift in investor sentiment which renewed US dollar (USD) weakness.

During early trade on Monday, the euro to US dollar (EUR/USD) exchange rate enjoyed a sharp run-up to the USD 1.1845 level. However, the currency pair slipped in the afternoon session after fears over rising coronavirus cases in Europe knocked some of the wind out of the euro (EUR).

However, the euro (EUR) may encounter some headwinds throughout the week as countries across Europe are battling to control a second wave of the coronavirus.

According to the latest figures from the EU’s European Centre for Disease Prevention and Control (ECDPC), in the past 24 hours France posted its highest daily number of new infections since May, while Spain confirmed that over 37,000 new COVID-19 cases had been recorded in the last week.

Although the euro (EUR) is holding steady during midday trade on Tuesday, rising COVID-19 cases could quickly undermine the single currency’s position in currency markets if investors believe that this poses a threat to economic recovery.

The bleak coronavirus outlook in Europe has already provided an element of protection for the pound to euro (GBP/EUR) exchange rate, as the currency pair has rebounded back above the EUR 1.11 level.

While the euro (EUR) remains exposed to downside risk, today it has found support from a markedly more positive German IFO report, which showed that business morale improved in August as activity in the manufacturing and services sectors picked up.

If the EU is able to continually produce upbeat economic data, this may improve the bloc’s recovery outlook and boost hopes of a strong economic rebound in the second half of the year.

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