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Pound moves higher with the US Dollar under pressure

GBP - British Pound

The Pound had a cracking Monday session rising to a 4 week high against the USD Dollar, comfortably breaking the 1.24 level and on open this morning has just broke through 1.25. Hopes of an economic recovery has prompted a ‘risk-on’ attitude among investors causing the ‘safe-haven’ dollar status to dissipate. With most European countries, including the UK, passed the peak of the pandemic, attention is now shifting to signs of improvement. Therefore, we could expect further gains against the Dollar and a charge towards 1.26 is quite possible. It was a similar theme against the Euro, with most European countries observing a public holiday trade was thin for the single currency. The Pound marched higher for most of the day breaking through 1.12 and this morning its making a charge for 1.13, a level last seen on the 15th May.

It’s worth noting that the Pound will still be weighed down by many factors, most notably Brexit related issues. Talks resume today with the EU and Britain has until July 1 to ask for an extension to the current transition period which is due to end in December. With this ‘cliff-edge’ type scenario the Pound could remain range bound unless there is a surprise breakthrough in the talks. Speculation continues to echo throughout the markets that the Bank of England could be exploring the possibility of negative interest rates, with these rumours ringing loud and if the BOE doesn’t squash these whispers many will believe it’s an option on the table and therefore preventing the Pound from gaining too much.

On the data front, the UK released its latest Manufacturing PMI at 9.30am yesterday. A number below 50 indicates contraction and 40.7 was to be expected. The number released was right on the forecast and whilst the number was an improvement on last month’s 32.6 it’s a contraction none the less. Some positives from the reading were the rate of Covid-19 infections are falling and therefore this should transpire into the Manufacturing sector, allowing it to slowly edge back into expansion territory ( a number above 50) albeit slow and steady.

Not much on the docket for the UK today but let’s not forget with Brexit talks resuming we could get some fall-out from this opening day so the Pound could be choppy.

Key Movers

The US Dollar came into work on the back foot on Monday amid growing concerns over US-China tensions and mass protests across America over the death of George Floyd in police custody. The topic on the riots is heating up as President Trump vowed in a speech last night to deploy thousands of heavily armed soldiers and law enforcement to halt the violence. Any type of civil unrest will spook investors so until this comes under control the Dollar could remain under pressure. On the data front for the US, manufacturing activity inched up from an 11-year low in May and although the reading was weaker than forecast, it aligned with market expectations that the worst of the economic downturn has passed. The Dollar has experienced a 5% drop after hitting its peak in March and this has allowed EUR/USD to march higher, yesterday's high of 1.1150 was last seen on the 17th March.

Last night we had the Reserve Bank of Australia rate decision, the first of 3 from central banks this week. As expected rates were held at the current level of 0.25%. The RBA did add that although the worst may be behind us the real economic impact may not be felt for some time, with the unemployment rate expected to rise further, perhaps keeping the door open for rate cuts further down the road. AUD/USD had been charging higher way before the RBA release, gaining about 15% since its lowest level back on the 19th March and whilst the overnight release from the RBA was not an aggressive market mover it will provide support to the Aussie's current level, a level last seen late January 2020.

The Euro was and will be treading carefully following yesterday’s release of the final Manufacturing PMI for May, which fell below forecasts from 39.5 to 39.4. However, this was up from the record slump of 33.4 in April. The concern for the Eurozone is Germany's struggles, given it’s the largest economy and it too saw Manufacturing staff cuts deepen in May. This will keep selling pressure on the currency especially with investors continuing to speculate over whether the European Central Bank will expand its Pandemic Emergency Purchase Programme (PEPP).

Expected Ranges

GBP/USD: 1.2480 - 1.2580 ▲

GBP/EUR: 1.1210 - 1.1290 ▲

GBP/AUD: 1.8320 - 1.8420 ▼

GBP/NZD: 1.9880 - 1.9990 ▼