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ACM Update Tuesday 29th September 2020

Rule of six, 10pm curfews, local lockdowns, it has all gone a tad Orwellian again. In our current dystopia Sterling is attempting a recovery on the back of progress on a Brexit deal. Will we see a sustained break higher or will further Covid restrictions provide a subdued tone going into Q4 for the pound?

You can view the recent movements in Cable (Sterling/Dollar) in the graph below –


If there is a deal to be struck between the UK and the EU then I would expect Sterling higher against the Dollar. Talks are looking positive and a deal at the EU summit may well be announced. We can forget anything north of 1.40 short-medium term. Possibility of 1.35 on a Brexit deal? Potentially. However, will we stick around at those levels for long? With Government debt through the £2 trillion mark for the first time there will be austerity or higher taxes. Neither option particularly palatable but one, if not both, will be necessary to pay for the costs of the pandemic. Granted, every other country will be in the same position although with the UK’s current approach to managing the pandemic the V shaped recovery is now looking distinctly unlikely.

In addition to Brexit and Coronavirus we also have the US election in November. The fun never stops it seems. Expect election campaigns to shift up a gear in October after the first televised debate early UK time Wednesday. The result of the election will have an impact on where the Dollar ends the year against Sterling. Guessing that end of year number is the tricky part. Please make sure you discuss a strategy with the trading team at Aston so you are neither over nor under hedged on your exposure going into Q4. There is a balance to be struck with mitigating downside risk whilst allowing room to take advantage of any upside moves in your favour. If you would like a member of the Aston team to get in touch with you please let me know directly.

In the more immediate future we have the Bank of England Governor Bailey speaking this afternoon where negative interest rates seems to be the hot topic. We also have UK GDP (QoQ) (Q2) released Wednesday with annualised (Q2) US GDP in the afternoon. Rounding off a busy week we have the NFP (Non-Farm payrolls) figure released Friday with a print of 850K expected.

You can view the movements in Sterling/Euro in the graph below –

We are dancing with 1.10 the figure on GBP/EUR with no real sustained move in either direction. However, with coronavirus cases and lockdowns increasing in the EU alongside inflation concerns and whether the ECB will provide more stimulus it may give GBP/EUR a slight bias to the upside. We have the ECB President, Christine Lagarde speaking Wednesday so we should gain further insight to the thinking of the central bank and how that might shape the direction of the single currency. If you hold EUR and need to move into GBP consider covering a portion of your exposure on a SPOT basis whilst implementing take profit orders to take advantage of any further downside in Sterling. The trading team at Aston is always on hand to answer any questions around technical levels and pricing so please do feel free to reach out to them directly and they will get in touch with you straightaway.

Q4 will certainly not be dull in the FX markets that is for sure. If you have any questions please feel free to contact me directly and we can chat through your requirements.

Have a fantastic week.

written by

Liam Alexander

Liam Alexander is the CCO at Aston Currency Management.

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