Pound Sterling in Short-term Gains vs. Euro and Dollar, UK wants September Trade Deal with EU

– The UK is aiming for a Brexit deal in September
– Broader market environment supports GBP
– Growing economic recovery helps

David Frost at the table

Above: file image. The Prime Minister's Europe Advisor and Chief Negotiator, David Frost, will moderate talks with the European Union negotiator, Michel Barnier, at 10 Downing Street. Picture by Andrew Parsons / 10 Downing Street

  • GBP / EUR spot: 1.1060 | GBP / USD spot: 1.3070
  • GBP / EUR bank rates: 1.1070 | GBP / USD bank rates: 1.2807
  • GBP / EUR special rates: 1.0960 | Special GBP / USD rates: 1.2955
    Find out more about market exchange rates here

The pound sterling outperformed the majority of its competitors in the past 24 hours as it appeared to be recovering from a shaky start to August. The gains came against a generally weaker US dollar, yen and franc, but also against the euro, which remains one of the better performers in the market over the past few weeks.

"The British pound is seeing gains against other major currencies, particularly the euro, during early Friday trading. Sterling gains have been driven by an improvement in risk appetite, with risk-related assets generally performing well and optimism about the ongoing Brexit as well -Negotiations in progress After David Frost, the UK's chief negotiator, said an agreement with the EU could be possible in September, "says Ricardo Evangelista, senior analyst at ActivTrades.

The broad outperformance makes us feel that there are some idiosyncratic reasons for Sterling's gains. Indeed, when a currency outperforms the majority of its G10 peers, it is usually a sign that there may be a real strength at play:

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Above: GBP outperformed the majority of its competitors on August 13th

The pound to euro exchange rate was only marginally higher at 1.1062, and we are finding that this is a currency that the pound sterling continues to struggle to find traction against. However, the pound to dollar exchange rate rose to 1.3117, which should encourage the bulls to return to a multi-week rally.

There isn't a single trigger for the pound to outperform, and if it did in July when the pound outperformed its peers, there appear to be a number of factors that we believe could play a role: 1] Improvement Brexit trade talks sentiment; 2] Supportive global markets; 3] Signs that the UK's economic recovery is overtaking that of the Eurozone and the US

1] Regarding the Brexit trade negotiations, the official line of both the EU and the UK is that the two sides are far apart on a number of crucial issues, but analysts see chances of reaching an agreement by October. Indeed, the UK negotiators said Thursday they are pushing to reach an agreement by September.

British negotiator David Frost said that on Thursday A Brexit agreement can be reached with the European Union in September.

"As we keep saying, we are not looking for a special or unique agreement. We basically want an agreement with a free trade agreement, as the EU has agreed with other friendly countries like Canada," said Frost. "The sovereignty of Great Britain over our laws, our courts or our fishing waters is of course not up for discussion and we will not accept anything that endangers it – just as we do not seek anything that endangers the integrity of the EU." Domestic market. "

Frost's proposal faces another round of negotiations next week and should be a reminder that the two sides remain determined to reach an agreement, even if they take a cautious stance on such an outcome.

"The negotiations on a post-Brexit deal were apparently more successful behind closed doors than on the main stage. However, the markets seem to be quite relaxed for the time being. We currently see no Brexit obstacles on the horizon that could derail the deal." GBP, "says Thomas Flury, strategist at UBS.

While the UK is looking for a September deal, it should be noted that it is ultimately the EU that sets the deadlines. Remember, the UK's original deadline for a deal was July, which passed without a blink of an eye. The EU heads of state and government will meet at a summit of the EU Council in October and, as is usually the case with the EU, the big decisions are only ever made at these summits.

Therefore, October remains a base target.

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2] Another supportive driver for sterling is the broader market environment with stocks and commodities rising. This is a significant development as the pound has proven to be a currency risk that increases when market sentiment is constructive.

"Over the past two weeks, the GBP has been the best performing G10 currency. Unless investors' overall risk sentiment generally deteriorates, the GBP appears to be well positioned to extend its progress in the short term," said Lee Hardman, one Currency analyst at MUFG.

As long as market sentiment remains constructive, we would expect sterling to continue to be supported, particularly against the US dollar, which tends to outperform the competition when markets fall.

We'd like to remind readers that August is traditionally a month when the markets tend to depreciate and the dollar tends to gain. Given we're only halfway through the month, a tracking of recent gains cannot be ruled out, especially given geopolitical tensions between China and the US and the continued inability of Republicans and Democrats to deliver a broader coronavirus stimulus package achieve what the markets seem to expect.

3] A third potential driver of Sterling's recent performance is the view that the UK's economic recovery is starting to pick up pace after experiencing one of the deepest, if not deepest, recessions in developed countries in the first half of 2020.

The UK economy was one of the last to be stalled, but it has had to stall longer than many of its peers, which was a particularly heavy blow to an economy that accounts for more than 80% of services.

However, as the gates for pubs, restaurants, hotels and other areas of the service sector will open at the beginning of July, the economy should pick up some momentum in the second half of the year.

How the recovery compares to the recoveries of other economies is important to exchange rates as we find ourselves in a world where economic outperformance is once again playing a role.

The OECD gathers real-time economic data from the world's largest economies and aggregates it into its composite leading indicator, which provides an overview of the major turning points in a business cycle and enables us to see how the economies are performing in relation to one another. The following are the composite leading indicators for the UK, US and Eurozone:

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The immediate impact is that the UK's economic recovery has started to outperform that of the Eurozone and the US. Should this be picked up on official data in the coming weeks and months, it could well lead to more sustained sterling advances.

While there has been an upswing after a few data points, there are other data to highlight the challenges ahead, including:

– a very gradual recovery in movement in London that is only 50% back to normal
– Box office receipts only 3% of what they normally are
– Use of public transport with around 30% of the potential well below normal
– Heathrow is down almost 90% from last year
– Job advertisements 50% of their 2019 level
– The search for redundancy reached its peak in July

With the vacation program slated to end in October, economists expect the unemployment rate to spike, which could slow the recovery. This would come around the time the UK and EU are heading for a crisis in October, suggesting the prospect of increased sterling volatility in the fall.

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