GBP - British pound
In the early hours of this morning, in a change to the usual schedule of when the Bank of England makes its announcements (just after midday) the Bank of England dropped the bombshell that it will be pumping £150 billion more into its bond buying programme in the latest twist to its quantitative easing programme. Sterling didn’t react to the news in the way some may have anticipated, strengthening by almost a whole cent versus the US dollar this morning. However, its clear that a dismissal by the BoE to send interest rates into negative territory for the first time in history has been perceived by the market as positive for the pound.
Yesterday saw weaker than expected PMI data for the UK, underscoring the effects of strained Brexit negotiations and Covid on the manufacturing and services sectors. The probability of a no-deal Brexit is still a very real one while the impact of the latest country wide lockdown will only be felt in weeks to come. Could the latest closures of the whole hospitality industry and non-essential shops see the unfortunate demise of many companies into the end of the year? The furlough scheme has been extended till 2nd of December, but many investors see this as ‘kicking the can down the road’ and an eventual mass unemployment with the country plunging into a deep recession in 2021. The markets are very fickle at the moment, and the latest bout of sterling strength could therefore be short-lived.
The US election continues to dominate proceedings this week, with a result hanging in the balance and being too close to call. We could be waiting days for a result to be announced, or even weeks as was the case back in 2000 when Bush vs Gore only saw a result announced on December 12th. Trump’s campaign has already requested a re-count of ballots in Wisconsin and the same could be asked for other states. All of this will do nothing to stem the flow of uncertainty in the market, which is expected to breed significant volatility until a result is announced.
So far, stocks have rallied hard on the news or lack of it. This may seem counterintuitive, but the two possible scenarios of a Democratic White House with a Republican Senate or a Republican White House with Republican Senate both appear to be positive for the economy and the markets.
The way the US dollar and currency markets will react to the election result may have nothing to do with the result itself, but the impact on the resultant stimulus package the US economy will receive. With a split government, even if Biden wins, sweeping policy changes like tax increases or more regulation is unlikely. If Trump wins, investors can expect more business friendly policies. So all in all, a split government is deemed positive for the US economy.
Tonight we saw the last of our trio of central bank announcements, with the FOMC in the US announcing their latest policy announcement for November. Little is expected here, with the latest US economic reports being relatively positive, the market widely expects the FOMC to hold interest rates (probably for the next few years at current levels) and not pump any more money into the economy.
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