GBP: GBP flies to 6 week high on Brexit optimism

EUR: Helped by a weak USD

USD: We think this move is overdone

Sterling

Sterling was the best performer globally yesterday with the market taking two comments from the EU negotiators positively. It was confirmed yesterday afternoon that EU chief negotiator Barnier will travel to London Thursday for talks. He also suggested that an agreement is “within reach.”

Earlier the EU had made clear that it is increasingly focused on UK sovereignty and see room for compromise on the Level Playing Field and fisheries, alongside being ready to talk about legal texts. These are not new pronouncements but symbolise a willingness to talk that has been lacking from recent conversations.

A weakening dollar also helped the pound with GBPUSD finding itself at the highest level for 6 weeks. We do not believe that sterling belongs up here given the real risks of a no-deal Brexit but have to acknowledge that markets now view the possibility of a deal more positively.

We will be watching for further positive headlines today.

Euro

The European single currency was happy to take some gains from the USD yesterday as markets drove risk higher on expectations of a stimulus deal in Washington before the election.

US Dollar

Dollar couldn’t get out of the way of the freight train that hit it yesterday, losing ground against every major currency save the Canadian dollar. Given the size of the move yesterday and the fact that conversations around US stimulus are the only news-worthy driver at the moment, red flags should be waving for a market convinced that US politicians will summon up the decency to do the right thing 11 days before the most divisive election of our time.

Talks are continuing between House Speaker Pelosi and Treasury Secretary Mnuchin and while the White House is also making positive noises around stimulus, President Trump’s absence is notable.

The final debate of this election takes place tonight (2am UK time) and we could either see a Trump announcement there or after with a bill being drafted over the coming week. That being said however, I really cannot see Republican senators leaving the campaign trail on tight races, in their last garrison fight against a blue wave of Democrat winners, to come to Washington and vote on a deal they don’t like.

If we’re right then this dollar move is very overdone.

Elsewhere

As noted above, all emerging market currencies came higher on a wave of USD weakness yesterday. For some currencies however, such as the AUD and NZD, this move comes amid some pretty challenging fundamentals and so we expect these levels may not last.

Have a great day.