The foreign exchange market in the coming week will be under pressure from the unpredictability of Brexit negotiations, an increase in the incidence of Covid-19, a protracted process of transfer of power in the United States, and disputes over a second aid package in the US Congress.
The combination of the above factors is a clear signal for the strengthening of the dollar. The US Federal Reserve Protocols are capable of strengthening or reversing this trend, where investors expect to see signals of expansion of market support. In this case, the dollar will give up its positions in favor of the growth of major currencies, among the dynamics of which the euro, pound and yen should be highlighted.
The EU countries will continue to fight for the adoption of the seven-year budget, blocked by Poland and Hungary. In the current version, both states are at risk of not receiving the coronavirus aid planned in the document due to problems with “European values.” This is not the first time this problem has arisen, and the EU has already proven that it can quickly reach a compromise. The adopted budget will be a signal for active purchases of euros.
The growth of the pound is associated with the negotiations on Brexit, the likelihood of an agreement on which is the higher, the less time remains until the end of this year.
The yen will receive a new, unusual growth factor next week in the form of intensified trade and diplomatic ties with China. The PRC is placing a serious stake on its “sworn friend”, realizing the futility of improving relations with the United States. The visit of the Chinese Foreign Minister may end with a series of “breakthrough” framework agreements that can have a positive effect on the economies of both countries.
In the coming week, Brexit-related events will contribute to the weakening of the dollar, and, consequently, the growth of the major currencies. Britain is now forced to negotiate with the EU. Biden’s victory in the United States left Prime Minister Boris Johnson no choice; England can no longer count on an American trade agreement.
Negotiators are likely rushing to reach the EU summit to reach key agreements on controversial issues that could lift the pound and euro. They and major currencies could also rally on a weaker dollar, following Biden’s selection of Treasury Secretary.
The new president is able to return to the White House officials known for their dovish policy in the financial sphere. In this situation, the US dollar will face double weakening blows from the Fed and the government in the form of various stimulus programs.
The dollar could be strengthened by the positive test results of the American coronavirus vaccine, which will be announced this week. However, the degree of influence of this event on the current economic processes is not yet known. Therefore, taking into account the inertia of the processes, it can be assumed that the dollar will weaken for some time.
The US presidential election will continue to affect foreign exchange markets over the course of the coming week. Donald Trump is determined to challenge the election, leading to a re-recount in some states.
According to analysts, this is unlikely to change the balance that has developed in favor of the Democrat Joe Biden, whose house has already been taken under the protection of the US Secret Service. Nevertheless, the incumbent is ready to go to the Supreme Court in his dispute.
In any case, the intrigue of the elections for investors has already been played out in full, which will lead to a correction of the currency markets in favor of the dollar due to overbought major currencies. They rose on expectations of the adoption of a second package of measures by the renewed composition of the US Congress and a possible expansion of the QE program by the FRS in December.
A tangible blow to European currencies could disrupt the Brexit talks. A new deadline for the UK-EU transition trade deal is set for mid-November. Judging by the absence of meaningful comments on this topic all last week, the parties got down to real business and looking for compromises.
The Asian currency market in the coming week may show increased volatility, which should be taken into account by traders practicing the strategy of night trading. This may be due to the disappointing statistics from the PRC. Orientation to domestic consumption and stagnation in global demand can stop the growth of the Chinese economy.
The fundamental background for the GBP / USD pair can still be described with just a few words: Brexit, negotiations on a trade deal, US elections. And during the last trading week there was no news on any of these topics. Now we are waiting for official information from the negotiating groups or top officials of the UK and the EU. However, there is no information yet. But there is information about the possible introduction of a new “lockdown” in the UK. This was stated by Prime Minister Boris Johnson. Quarantine measures may come into force on November 4 and last exactly one month. According to Johns Hopkins University, the number of new cases in the UK continues to rise, with nearly 25,000 new cases recorded in the past three days. Thus, the UK may become the third country after France and Germany to introduce a “hard quarantine”. Earlier, Boris Johnson said that there would be no new lockdown, as it would mean a new economic decline. As you can see, Johnson easily changes his mind and takes the words back, which, however, does not happen for the first time. Well, the new “lockdown” will significantly increase the likelihood of another fall in the British currency, as it will potentially mean a new contraction of the British economy. In the third quarter, UK GDP may grow by 15.1%, but losses in the second quarter are much higher. The UK may enter 2021 with serious losses that will only increase as Brexit officially ends on December 31st. In American English, lockdown has been used since the 1970s to mean “Strict isolation of prisoners as a security measure after the riots.” Previously, it was used mainly in prisons. Now the whole world is becoming a big prison.
The fundamental background of the GBPUSD pair in the coming week will be determined by the following factors: Brexit, negotiations on a trade deal, elections in the US. And during the last trading week, there was no news on any of these topics. Thus, the strengthening of the British currency can even be associated with the absence of negative from the UK, but the overall fundamental background in England remains extremely difficult. In fact, Brussels and London can announce the final completion of negotiations on a trade deal at any time due to the impossibility of reaching an agreement. And although it can be assumed that negotiations in one format or another will continue until the parties come to an agreement, it just might take much longer, as long as we are talking about an agreement until December 31. And until December 31, the parties will not have time to sign the deal. This was clear back in March. Thus, sooner or later, the British currency will collapse again. So far, it is partly kept afloat due to the unstable political situation in the United States, as well as due to the complete uncertainty of the future in this country. However, after the elections (I want to believe that they will not drag on for long weeks and months), the situation should become easier and simpler, which will relieve tension from the dollar bulls. Moreover, there is a whole list of reasons why the pound sterling has nothing to count on next year. Thus, the pound is likely to maintain a long-term downtrend, which began back in 2007 and resumed in 2014.