Sterling Outlook: Limited Recovery Amidst Brexit, Pandemic, and US Election Woes

2020 has been a difficult year for the British economy due to the fallout of the pandemic and Brexit. Yet, despite this there has been a limited recovery with the GBP/USD pair recently climbing above 1.2900 and reaching 1.2942. This was mostly spurred by encouraging UK data, a renewed risk-appetite, and the dollar’s weakness. Yet despite this increase against the dollar, the sterling is still facing an uncertain future.

The GDP and pandemic

The country’s final reading of the Q2 Gross Domestic Product on the 30th of September was revised to -19.8% from -20.4% which showed limited growth. Further proof of this recovery was the sterling’s daily performance rallying, with FXCM showing that the GBP experienced a 0.29% increase on 1st October from the previous day of -0.1329%. Despite this, the GDP suffered a larger decline than most of it’s European neighbours, reflecting the timing and duration of the U.K.’s nationwide lockdown to combat the ongoing pandemic.

And this doesn’t look like it will reverse in the near future as new pandemic restrictions are being reinforced all over Britain. In a press conference on 30th of September, Johnson said the virus remained a “national threat and a national challenge” and warned that he would “bear down on the virus where we need to do that most.” In turn, this has led to fears that a second lockdown will occur.

Despite being put in place to avoid a second lockdown the new instructions set by the government has greatly affected the sterling, as Reuters reported that it fell to two-month lows ahead of the official announcement. The news site noted that “Sterling fell 0.51% to $1.2751 against the dollar, the lowest level since 24th July while the pound was down 0.25% against the euro at 92 pence.”

Brexit woes

The sterling has been reported to have depreciated by around 5% against the USD in September, due to the country expecting to fully exit the European Union in three months. Despite more than four years passing since the official vote to leave in June 2016, Boris Johnson’s government has yet to reach an agreement.

While the UK has a self-imposed 15th October deadline for the discussions in line with the EU leaders summit, talks are expected to extend until at least the end of October. As the timeline tightens, the GBP is highly likely to decrease in value as there is no indication that the deadlock will be broken.

Room for more decline after the US debate

More than issues happening within the country, the GBP/USD pair has been on the back foot as the dollar’s value increased following the presidential debate. President Donald Trump and Democratic presidential candidate Joe Biden battled fiercely over Trump’s response to the pandemic, healthcare, and the economy in a chaotic bad-tempered first debate. Fuelling concerns over a disputed outcome in November, analyst Tim Clayton outlined how the pound-to-dollar rate failed to hold at 1.2900 and instead retreated to 1.2825, pushing the GBP/USD pair lower. He also said “Global risk appetite has weakened over the past 24 hours with equity markets moving lower as Wall Street posted losses. The acrimonious US Presidential debate has reinforced market concerns over the risk of a disputed result in November and contributed to the more defensive tone.”

Despite the limited recovery between 30th September and 1st October, the sterling is extremely volatile due to the current events happening in the country, in the USA, and around the globe. If Brexit can be resolved, then expect this limited recovery to continue. If not, expect further slides going into 2021.

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