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Important Changes for the GBP This Week

November 12, 2020 By Mircea Vasiu

For the first week following the U.S. elections outcome, trading has been chaotic, to say the least. Equities, as well as currencies, look for direction after the news that a potential COVID-19 vaccine may come as soon as next year.

Such news created chaos as much as the one seen at the start of the pandemic. Investors looking for direction began assets’ rotation in different areas. One of those assets might be the Great Britain Pound (GBP).

If anything, there is a constructive sentiment surrounding the British Pound, especially since Biden’s election. However, today’s GBP release shows, once again, that the United Kingdom is one of the hardest-hit countries by the economic recession. Also, the COVID-19 death toll shows how bad it managed the pandemic.

Will forward-looking investors bid for the GBP in the period ahead?

What’s New for the United Kingdom’s Economy and Its Currency?

Perhaps the most important, forward-looking event that has a strong impact on the U.K.’s policy is Biden’ election as the new President of the United States. Democrats made it clear that they will not tolerate a breach of the Good Friday agreement, and the U.K. will do anything in its powers to protect the relations with the U.S. As such, the expectations are that a Brexit trade deal will come to fruition sooner rather than later.

The market reacted subtly by sending the EURGBP lower from 0.90 to mid-0.87. However, it rebounded quickly on the back of still strong demand for the Euro.

Today’s third-quarter GDP release shows a strong bounce. Perhaps this is the reason why the GBP came back against the EUR, but any positive development here should be taken with a grain of salt. While this is the sharpest expansion seen in a quarter since 1955, the contraction, when compared to the end of 2019 still shows an almost 10% decline.

Bank of England’s Governor Bailey is about to participate in a policy panel at the ECB Forum on Central Banking. Ahead of the appearance, he shared some thoughts about today’s GDP data, calling it in line with where the BOE thought it would be. Namely, he noted a strong recovery, but also a huge gap to fill when compared to the same period of 2019.

To sum up, the U.K. economic developments for the rest of the year will likely have a strong impact on the GBP. This is a currency that mostly moved based on the Brexit resolution. As we come close to the end of it, expect the GBP volatility to increase significantly.