Euro jumps on US stimulus hopes as deadline looms
The euro leapt to its strongest position in almost a week against the US dollar on Monday, despite the surge in
European COVID cases and concerns surrounding the bloc’s economic recovery.
Most risk assets were well supported yesterday morning by the robust set of macroeconomic numbers out of
China, which has fuelled optimism around the rebound in Asia’s largest economy. While the third quarter GDP
growth number was largely as expected, investors were buoyed by the September retail sales figures, which
jumped by a greater than forecast 3.3% year-on-year.
Currency traders were also hopeful that a US stimulus package could be forced through before next month’s
election on 3rd November, buoying risk assets and weighing on the safe-haven greenback. This came after
upbeat comments from US House Speaker Nancy Pelosi, who said that it would be possible to push through
spending plans before the vote, albeit this would need to be agreed upon by the end of today. The sell-off in
US equity markets in the past 24 hours does, however, suggests that the market is not overly convinced there is
enough time or support in Congress in order to force these measures through.
A likely lack of agreement in Congress, combined with rising virus caseloads in Europe present downside risks
to the common currency this week. France, Italy, Spain and Germany have all registered record high reported
cases of the virus in the past few days, with new restrictions being introduced almost daily. This Friday’s
European PMI data will now be key, given that it is the first meaningful data release that covers the period of
tightened restrictions. We think that a major downside surprise here could trigger a sharp move lower in the
euro at the end of the week.
Pound gives back gains amid ongoing Brexit uncertainty
Sterling briefly rallied versus the broadly weaker US dollar yesterday, although failed
to hold on to its gains as trading progressed. The lack of a more sustained move higher in the pound can, of
course, be attributed to uncertainty surrounding Brexit. The UK has stated that it will not re-enter into
negotiations unless the EU dramatically changes its stance – so far the reaction in financial markets suggest that
investors believe that they will and that talks will resume in the next few days.
Aside from Brexit developments, this week will be an important one for data releases and central bank
speeches in the UK. Inflation data on Wednesday, retail sales and PMIs (both on Friday), all have potential to
be market movers. Bank of England MPC members Bailey, Haldane, Ramsden and Cunliffe will also all be
speaking this week, with the market paying particularly close attention to any comments on the possibility of
negative interest rates in the UK. So far there appears to real consensus in the BoE as to whether or not
sub-zero rates is a viable option. Should more members of the committee begin to sway towards a negative
interest policy, then expect a fairly sharp move lower in the pound.