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GBP/USD and GBP/EUR buoyed by progress in Brexit trade talks

The British pound (GBP) has made a modest 0.65% gain against the euro (EUR) this week, courtesy of renewed hopes over progress in Brexit trade talks.

On Thursday, EU Commission President Ursula von der Leyen confirmed a newswire report from Bloomberg which had said the UK and the EU were making headway on outstanding issues such as state aid and the competitive level-playing field.

A lack of rhetoric over Brexit trade talks had seen the pound Sterling (GBP) falter mid-week, but the UK currency has found strong support on Friday following Von der Leyen’s statement.

At the time of writing, the British pound to US dollar (GBP/USD) exchange rate and the British pound to euro (GBP/EUR) exchange rate are both trading 0.3% higher at USD 1.298 and EUR 1.1111 respectively.

Meanwhile, European Council President Charles Michel is optimistic that the ratification process can begin mid-November and expects the status of Brexit trade negotiations will likely be assessed next week.

After years of political wrangling, it is hoped that by November 3rd, UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen will conclude a post-Brexit trade deal.

Western Union Currency Strategist, George Vessey noted that “the European Parliament is required to ratify any accord, so mid-November is the final deadline for negotiators to reach a free trade agreement.” 

He noted that if a Brexit trade deal is brokered next week, GBP/EUR could rally towards the EUR 1.15 level, while a breach USD 1.35 would be likely for GBP/USD.

However, with coronavirus cases surging across both sides of the Atlantic amid reports of the PM Boris Johnson considering a second national lockdown, “upside for the risk-sensitive pound may be limited,” adds Vessey.

It already seems Brexit is becoming less of a primary driver for pound Sterling (GBP) as news of lockdowns in Europe, a lack of progress over a US stimulus package and the looming US presidential elections have also triggered significant GBP volatility.

While GBP/USD is outperforming on Friday, the currency pair is nursing a weekly loss of approximately 0.5% having fallen from highs of USD 1.30788 due to renewed demand for the greenback amid heightened uncertainty.

US dollar rally stalls ahead of presidential elections

After four successive sessions of gains, the US Dollar Index has lost traction on the final day of the trading week and is 0.12% lower at 93.85.

This week’s safe-haven environment has lent significant support to the US dollar (USD), with gains being driven by spiralling COVID-19 cases in Europe which has prompted German and French governments to reimpose national coronavirus lockdowns.

Daily global COVID-19 infections hit a record 500,000 on Wednesday, levels unseen even during the first wave of the pandemic. As a result, equity markets, oil prices and riskier assets plummeted, while safe-haven currencies such as the US dollar (USD) gained.

However, the greenback has lost its bullish momentum on Friday after a tranche of polls revealed that President Donald Trump’s Democratic challenger, Joe Biden had widened his lead.

According to FiveThirtyEight’s election modelling, President Trump has an 88% chance of winning while the Economist forecasts his odds to be even lower, at 4%.

After taking into account 100 possible scenarios in the election, FiveThirtyEight also favours a Democrat victory in the Senate, forecasting odds of winning at 80%.

With less than five days to go until the US elections, this new development appears to have reignited the “Blue Wave” theme in currency markets and reduced some of the US dollar’s (USD) appeal.

Analysts widely believe a Democratic landslide would pave the way for a larger stimulus package for the US economy, which would cause the US dollar (USD) to fall in currency markets.

However, the greenback is facing conflicting forces as there is also some reluctance to buy into what the polls are saying given what happened at the last election when Hillary Clinton, who led the polls in the 2016 presidential race lost surprisingly to Donald Trump.

Even if the US dollar (USD) continues to turn weaker on Friday, the greenback has secured a weekly advance of 0.6% against pound Sterling (GBP) and 1.58% against the euro (EUR).

Euro set for weekly losses against the US dollar and British pound

The single currency has come under intense pressure this week as surging cases in Europe saw the European Central Bank (ECB) deliver a dovish statement on the Eurozone’s economic outlook and hint towards further easing at the next monetary policy statement. 

While the euro to US dollar (EUR/USD) exchange rate is flat on Friday at USD 1.1674, the currency pair is above the monthly low by a hair’s breadth.

Today’s release of stronger-than-expected gross domestic product (GDP) data for Q3 has also done little for the euro (EUR), as investors are more concerned with how the economy fares over the coming quarter given that lockdowns will likely reverse recovery.

The ECB’s markedly dovish tone in Thursday’s policy meeting has also weighed heavy on the euro (EUR). President Christine Lagarde issued a dire warning over the bloc’s economic outlook due to the second COVID-19 wave, stating it’s going to be a dark November for the EU.

With uncertainty peaking ahead of Tuesday’s US elections and concerns over the coronavirus looming over FX markets, the US dollar (USD) could find itself back on the strong foot heading into the weekend.

Although GBP is being threatened by growing prospects of the UK government imposing a second national lockdown, Brexit optimism could prove to be a source of support for GBP/EUR exchange rates.

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