The US Dollar has fallen to a 2-year low against the Euro as concerns over weak US economic growth, a fall in US treasury bond yields and the lack of any agreed US Covid-19 stimulus package continue to weigh on the Greenback.
The USD has had an exceptionally strong few years but the coronavirus crisis has hit the world’s biggest economy hard, pushing investors away from the buck. Although the rise in new US case numbers has started to abate, traders fear the impact of the pandemic will be deeper and the recovery will be slower than previously expected. The US government have still not agreed on a new Covid support package after the previous stimulus measure ended in July and the upcoming US election is only adding to the US political uncertainty. Furthermore, money is flowing out of USD safe-haven trades which is adding to the dollar’s woes.
Positive sentiment towards the Euro has encouraged traders to sell the USD in favour of the Euro which has pushed the EUR/USD rate to a fresh 2-year high today (and over 1.19). All eyes are now looking out to see whether it can break the key psychological level of 1.20, which (if broken) could open it up to further gains. The GBP/USD has also benefitted from this persistent dollar weakness and it (GBP/USD) now trades at the highest levels since the start of the year. Although some analysts feel bets against the USD are becoming overcrowded, there are many who feel there’s still plenty of momentum and that the move has further to go.
In other news, Brexit negotiations recommenced this week and the UK government said yesterday they believe a deal can be sorted by next month. Talks will be watched closely this week after last month’s talks ended with no progress. September and October are being touted as the business end of these talks and we therefore expect volatility in the Pound to increase. Some analysts believe a deal will be struck with the EU before the end of the year but it “will have more of a ‘hard Brexit’ feel” (Roger Hallam, JP Morgan).
Aside from Brexit, the UK faces many other headwinds which have been exacerbated by the pandemic. We hit a record low in second quarter UK GDP last week, we’re seeing unprecedented borrowing levels (national debt is now 99.6% of GDP) and we continue to be heavily reliant on foreign capital. The Bank of England remain relatively upbeat on the economy, however, and do not seem in a rush to take us into negative interest rates.