GBP/USD: Lockdown fears to overshadow positive Brexit news – MUFG

The cable has raised back above the 1.3000-level and EUR/GBP has moved closer towards support at the 0.9000-level but COVID-19 fears are set to dampen the positive Brexit news impact on the pound, economists at MUFG Bank report.

Key quotes

“Amidst the lockdown gloom on Wednesday, there was one glimmer of light in the form of a Bloomberg report suggesting that a Brexit deal is ‘inching closer into view’.” 

“The price action highlights that it will be more difficult for the pound to strengthen on the back of rising Brexit deal optimism while fears continue to build over the need for economic restrictions. The pound remains sensitive to gyrations in risk sentiment. We would expect the pound to underperform again if risk assets corrected lower.” 

“PM Boris Johnson is coming under increasing pressure to consider reintroducing lockdown measures in the UK. The latest report from Imperial College London and Ipsos Mori estimated that infections are doubling every nine days. It has taken some of the shine off the positive news that there has been some progress in Brexit trade talks this week which has increased optimism that a deal could be reached by early November. According to Bloomberg, the two sides have begun work on text of an agreement on the level competitive playing field and are close to finalising document on state aid. They have also moved closer to deciding essential aspects of how accord will be enforced.” 

“Overall, the developments support our view that it will be difficult for cable to rise beyond 1.3000 to 1.3500 in the current circumstances even if a deal is reached.”