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GBP firm amid latest Brexit headlines, COVID-19 risks remain

Pound Sterling (GBP) is currently trading at its highest level in four weeks as sentiment over a UK-EU Brexit trade deal continues to improve.

The British pound to US dollar (GBP/USD) exchange rate has advanced above the USD 1.30 level, while the British pound to euro (GBP/EUR) exchange rate is holding steady at EUR 1.1035.

Optimism over a Brexit trade agreement also poised the FTSE 100 for gains this morning. However, the blue-chip index has fallen back into the red during midday trade as traders reflect on Prime Minister Boris Johnson’s imminent warning over imposing more stringent COVID-19 restrictions and measures in the UK.

But while rising coronavirus cases will continue to threaten the British pounds (GBP) strength, this week, the UK currency will be primarily driven by Brexit negotiation developments.

EU leaders will convene for a two-day summit in Brussels commencing Thursday to discuss several matters, including future UK-EU relations. Although many suspect a Brexit trade deal will not be reached by Thursday, foreign exchange (FX) markets widely expect EU leaders will set the scene for the chances of a free trade agreement.

With that being said, nerves will likely remain elevated ahead of the make-or-break European Council meeting, and as a result, GBP/EUR and GBP/USD could experience some choppy trade over the coming days.

Last week, UK Prime Minister Boris Johnson also reiterated that the UK would walk away from trade talks if a Brexit deal isn’t outlined by Thursday, which is adding to FX market angst.

CBA FX Strategist Kim Mundy said that “under a no-deal outcome, GBP/USD will likely retreat towards the USD 1.25 level.” However, she forecasts GBP/USD to rally above the USD 1.35 level if both parties reach an agreement.

Further evidence of a more positive tone in Brexit talks will also support the export-heavy FTSE 100, which is the worst-performing major index year-to-date.

Those with currency requirements should be aware that Brexit headlines will dominate price action and volatility in pound Sterling (GBP) for the majority of the week.

GBP/EUR trading above EUR 1.10 level

The British pound to euro (GBP/EUR) exchange rate is trading near monthly highs on the first day of the trading week, and it is possible to secure these current levels for use in the future with Halo Financial to protect yourself against further volatility.

Pound Sterling (GBP) experienced turbulent trade in September amid evidence of COVID-19 cases spiking across Europe, UK government’s controversial Internal Market Bill and further political fallout in Brexit trade talks.

UK Cabinet Office Minister Michael Gove said the likelihood of a deal being achieved has risen to 66%, and recently there have been fewer comments from the UK and the EU on governance, state aid and level-playing field issues. However, both sides continue to contend with the fisheries matter.

The UK is refusing to compromise on the autonomy of its waters; while, EU coastal states, including France, are maintaining their hard stance on access to UK waters.

Several EU leaders have demanded the bloc’s fishing states drop their unrealistic demands, fearing that these hardliners will thwart chances of a UK-EU Brexit trade deal.

However, this remains a heated issue between Brexit officials, and Boris Johnson has already warned French President Emmanuel Macron to give ground over post-Brexit fishing quotas, or the UK will walk away from negotiations.

Several politicians and political commenters have insisted that it is in the interest of both sides to agree on a future trade relationship given the economic devastation caused by COVID-19.

Europe’s deteriorating coronavirus situation is now exerting significant pressure on the euro (EUR), which could begin to fall against pound Sterling (GBP) and other major currencies if cases continue to spike.

Traders will continue to monitor ongoing global political developments and coronavirus cases this week, which could trigger further volatility in the British pound (GBP), the euro (EUR) and the US dollar (USD).

US Dollars

GBP/USD vulnerable ahead of crunch EU Summit

The British pound to US dollar (GBP/USD) exchange rate is trading comfortably above the USD 1.30 level at USD 1.3017. However, until it becomes wholly apparent that the UK and the EU have outlined a Brexit deal, GBP will struggle to make a significant direction push.

Richard Perry, analyst and technical forecaster at Hantec Markets said that until GBP/USD breaks above the USD 1.3050 level, it is too early to say whether further gains are possible.

Given the lack of clarity over the status of Brexit trade talks, uncertainty over the prospect of Congress passing further stimulus for the United States and the possibility of a Biden-win in the upcoming presidential elections, the odds are slim for GBP today.

Although FX markets are tentatively pricing in moves for a Brexit deal and a Biden-win, which investors believe will result in further financial aid for the US economy, cautious optimism will likely prevent any substantial moves in pound Sterling (GBP).

In the absence of any notable economic data, the cautious look in currency markets could aid the US dollar (USD) higher on the first day of the new trading week.

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