Morning Commentary: Manchester Not-United

Foreign Exchange - Morning Commentary
Manchester Not-United 
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The British pound (GBP) has been one of the G10’s top-performing currencies this past week. This move higher in the pound was sparked by the restart of Brexit talks and hopes of finding a deal by mid-November. 

While recent price action around the GBP has been positive, all is not well. U.K. politics remain contentious, not just with the EU, Scotland and Northern Ireland with the U.K. government but also between English regions and the central government. Specifically, the government’s decision to place Manchester on the toughest tier 3 lockdown level has put the city government in open conflict with the central government.

This key point of contention is financial support, which the city views as insufficient, for the economic losses due to lockdown measures. The city government is pointing out that the amount of financial support in question is a small fraction of what has already been spent fighting the pandemic. This point is further underscored if one also considers how the Bank of England is monetizing the central government’s massive budget deficit through asset purchases.

The political turmoil is relevant for the GBP for two reasons. The first relates to the negative economic impact of yet another major U.K. city being put on lockdown. Further, there is growing concern that these regional measures could shift to national measures, as many health experts feel the U.K. government’s current tiering plan is insufficient for a small and population-dense country.

The second factor concerns the U.K. government’s ability to handle crisis. Critics have cited an ever-lengthening list of poorly handled situations by the U.K. government, and this track record doesn’t bode well for a much more complicated diplomatic situation such as Brexit talks. Given the U.K. government’s general approach to Brexit, the odds of talks being concluded in a smooth manner are slim. More likely, there will be more apprehension and rising tensions before a deal, if there is one, is reached. So while the GBP has rallied on Brexit deal hopes, the nature of the talks and the reality of the U.K.’s difficult economic picture, even with a deal, should at a minimum cap gains and lead to a bias to sell rallies. 
  • The last presidential debate was held last night and was much less heated than the first time around. Ultimately, this last debate might not be all that consequential, as there are few undecided voters left and debates late in the cycle rarely make a material difference to voting preference. For what it’s worth, a CNN instant poll showed Biden winning the debate 53% to 39%. The YouGov poll showed Biden winning 54% to 35%. Betting odds for a Biden victory moved up to 65% from 60%.
  • Senate Republican resistance to the stimulus bill being negotiated by House Speaker Nancy Pelosi and the White House is solidifying. Reports suggest that some Senate Republicans feel the White House is giving away too much in regard to the top-line number and state and local aid. Senator John Thune, who is the Senate majority whip responsible for rounding up votes and enforcing party discipline, has publicly stated it will be difficult to gain 13 Senate Republican votes to support a deal similar to the one being negotiated. Thirteen Republican votes is the minimum needed for the Senate to pass the legislation if all Democrats vote for it.
  • Eurozone PMI numbers were mixed, with manufacturing PMI beating expectations but services disappointing. On a country level, Germany’s PMI numbers followed the same pattern, with manufacturing solid but services soft. This dynamic is expected and should continue, as COVID-19 lockdowns tend to hit the services sector hardest, while exports, especially to Asia where the virus is under better control, remain firm.
  • Australian PMI numbers came in solid, with the composite number rising to 53.6 from 51.1. Despite this positive PMI data, markets are still pricing in an 83% chance of a rate cut at the Reserve Bank of Australia’s Nov. 3 meeting.
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