Mr. Vaqarjaved Khan, Research Analyst, Angel Broking Ltd
Price performance
Since the inception of October GBPUSD has increased by 1 percent and GBPINR has depreciated by 1.7 percent despiteescalation of coronavirus cases in UK and brexit related tensions between EU and UK. Meanwhile, the safe haven dollar index declined by 0.83 percent during this time period aiding the rally in Pound.
A deadlier second wave grapple the UK
Second wave of coronavirus cases has completely grappled the UK with country posting on average 20000 cases per day in the last one week. The total infections in the country has now reached 894690 cases and death toll at 44998. As the coronavirus cases continue to climb fresh restrictions are likely to be imposed in major parts of England.
In line with the lockdowns the UK economy contracted by 20.4 percent in Q2 2020 on account of coronavirus induced lockdowns in the first half of the quarter. The fall in GDP was majorly on account of services, construction and production sectors contributing to major fall.
UK’s GDP contraction was by far the highest among its developed economy peers. In line with contraction the economy UK unemployment rate is expected to spike to 4.5 percent amid winter job fears. With British government salary support ending this month and new restrictions are imposed to curb coronavirus cases will lead to higher unemployment going forward.
Can the Brexit mystery unravel?
UK and EU started their post Brexit negotiations on 22nd October to reach a long halted deal between the two parties. The two parties continue to remain at loggerheads over the fishing rights. PM Boris Johnson’s spokesperson admitted that there is very little time left to bridge the gaps between UK and EU’s position on sticking points in talks about a post Brexit deal. He admitted that a lot of work on important aspects needs to be completed in a very short span of time.
Andrew Bailey continued hinting at negative interest rates
BOE Governor asked banks on their operational readiness for zero or negative interest rates going forward. BOE has set a deadline of 12th November for the banks to respond a week after their next monetary policy meeting.
Policy makers are expected to expand their bond buyback program in November. The Governor said that the economy remains 7-10 percent smaller than it was before the crisis.
Outlook
Post Brexit deal negotiations and rapid increase in coronavirus cases continue to a play a centre part in the movement in Pound. Markets are expecting an 11th hour deal between the two parties but the pendulum of the discussions can sway in either way.
Fisheries and certain important trade aspects continue to remain the bone of contention in the Brexit talks between EU and UK. Hence according to both parties major work needs to done but a deal is still on the cards.
Central banks continue to maintain their accommodative stance to help the economies fight the negative repercussions of the virus. In line with major central banks across the globe, BOE is expected to increase its bond buyback programme by 100 billion pounds in its next meeting on 5th November. The cumulative bond buyback programme after the increase will stand at 845 billion pounds.
Hence, going forward a possibility of a post trade deal and increase in the bond buyback program can act as near term trigger in Pound rally.
Hence, GBPINRSpot (CMP: 96) is likely to move higher towards 97 mark by the end of Nov’20.
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