Between the Brexit negotiations, the Covid-19 pandemic, and the looming presidential election in the United States the GBP/USD has been on a wild ride in 2020. But where will it go next and what are the factors that will alter its path?
Chris Cammack, chief writer at FxScouts, a Forex trading journal, points out that the future doesn’t look to bright: “There are multiple factors weighing on the GBP/USD in the medium term – and the long-term doesn’t look much better. While the Bank of England’s resistance to negative interest rates will provide some support, the other fundamentals are pretty grim.”
Many political and financial analysts agree that Tuesday, November 3 will be one of the most influential days of the coming decade. The winner of the US presidential election will shape the geo-political future of the world as it pushes through one of the greatest moments of crisis in memory. The two contenders have sharply different worldviews, and the outcome will have both immediate and long-lasting effects on the Forex market.
President Trump’s refusal to commit to accepting electoral defeat sent shockwaves through the political and financial communities. No stranger to controversy, his remarks followed on from a series of attacks on mail-in voting and allegations of voter fraud.
Counter-intuitively, this has led to a strong support of the safe-haven USD, despite the threat to stability stemming from Washington DC. As long as uncertainty remains about a clear and quick outcome to the US election, we can expect strong support for the USD and a further weakening of the GBP/USD.
No less important for the GBP/USD is the continued economic suffering being inflicted on the UK by the Covid-19 pandemic. Already one of the worst-hit nations in the world, both economically and medically, the UK is now looking down the barrel of second wave as it enters the colder months. A new series of restrictions have been applied across the country, with local lockdowns being threatened across swathes of northern England.
While this is obviously terrible news for the UK’s already battered economy, a political fight is also now brewing over the newest restrictions. Parliamentary members of Boris Johnson’s Conservative Party, already weary of his perceived incompetence during the pandemic, have taken umbrage at the newest restrictions being forced through by diktat, thereby avoiding parliamentary approval. This fresh round of political uncertainty will do no favours for the GBP/USD over the next few months, and if it results in a full-blown political standoff, expect a significant weakening pressure.
The final nail in the GBP/USD’s coffin is the ongoing Brexit saga. The gift that keeps on giving, Brexit negotiations between the EU and the UK have been dragging on for months without much public optimism from either side. Recent events have included Johnson’s government threatening to break international law by ignoring part of the Withdrawal Agreement signed by both sides prior to the transition period. The EU has responded by accusing the UK of being an untrustworthy negotiating partner.
Another of the big sticking points has been the EU’s fishing rights in British waters. Though a tiny factor economically, this has become a major issue due to its implications for sovereignty. For many, fishing rights are seen as symbolic of Britain’s independence from the EU. Pro-Brexit politicians in the UK have repeatedly promised British fishermen that EU trawlers will have seriously restricted access to British waters post-Brexit. Currently 42% of all fish caught in the EU are taken from British waters and it is one area of the Brexit negotiations where the British have the upper hand.
EU negotiators, both privately and publicly, have repeatedly expressed their concerns that the two sides stances on fishing in the UK’s waters have the potential to derail any final deal before the December 31st deadline. As long as the threat of a no-deal Brexit remains on the horizon, expect the GBP/USD to remain under pressure.
If some kind of deal is struck between the EU and the UK before Christmas and the US election results in a clear and uncontested outcome, we could see sustained support for the GBP through the winter. But the long-term economic effects of the Covid-19 pandemic will continue to provide a systemic weakness, potentially for years to come.
