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Pound Sterling Hits New 2021 Best against the Euro

The British Pound leapt in value against all its major peers on Tuesday, banking gains that come in sympathy with an ongoing move higher in global equity markets which provide the supportive sentiment backdrop within which the Pound traditionally appreciates.

Adding to this is an expectation that the Bank of England could raise interest rates as soon as November 04, putting it months, if not years, ahead of the European Central Bank (ECB) in this regard. However advances against the Dollar remain shallow, given the U.S. Federal Reserve is on target to raise interest rates in 2022 with the November policy meeting likely to provide confirmation of this.

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Confidence for a rate hike at the Bank will have been bolstered by recent signs UK Covid-19 cases are turning lower once more, suggesting the coming winter months might not be as difficult as many had feared, opening up the potential for a robust rebound in economic activity into year-end.

“The British pound hit a new 2021 high versus the euro this morning. In fact, it’s the highest level since the pandemic-induced market turmoil in March 2020. UK bond yields continue to surge with the 10-year yield above 29-month highs, boosting GBP demand, particularly against low-yielding currencies like EUR,” says George Vessey at Western Union Business Solutions.

Pound to Euro exchange rate has reached a new 2021 high after it hit 1.1898 on October 26, the Pound to Dollar exchange rate meanwhile pushed above 1.38 again to quote at 1.3820.

“Pound crosses are continuing to shine brightly today as investors increase their expectations over an imminent interest rate hike in the UK,” says Fawad Razaqzada, Market Analyst at ThinkMarkets.com

Bank of England Governor Andrew Bailey said last week the Bank “will have to act” to keep a lid on inflationary pressures and the markets now expect a 15 basis point interest rate rise to be delivered on November 04.

The risk to the Pound’s recent gains is that this is not in fact delivered and the Bank strikes a more cautious tone on the outlook, in an attempt to pare market expectations for further rate hikes in 2022.

This pushback is expected by numerous analysts we follow: most recently NatWest Markets said they are exiting their long-held bet for Pound-Euro upside saying there is a risk the Bank of England strikes a more subdued tone next week.

“Only a hawkish statement by the Bank of England suggesting a faster sequence of hikes than the market currently expects might support the pound, but this is not something we are expecting,” says Thomas Flurry, a strategist at UBS.

The Euro does however meanwhile appear to be under pressure ahead of Thursday’s European Central Bank (ECB) meeting, where policy makers are expected to push back against market expectations for a 2021 rate rise.

Jeremy Thomson-Cook, Chief Economist at Equals Money, says the ECB meeting on Thursday is “set to offer” Euro weakness.

“We are very much expecting “more of the same” from the European Central Bank on Thursday. There is no way that they can’t acknowledge that inflation has run higher but also they do not want to get dragged into a game of expectations, given the ECB’s dovish proclivities,” says Thomson-Cook.

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Investors will find the October ECB policy meeting more interesting than normal as President Christine Lagarde is expected to fight the market’s expectation that 2024 is too late for a first rate rise.

Euro exchange rates could therefore prove volatile, reacting to Lagarde’s performance.

Market pricing that now shows investors anticipate the first ECB rate rise to fall as early as late-2022 as policy makers are forced to react to rising inflation levels.

Money markets currently expect a rate rises of close to 10bp in a year and more than 30bp in two years.

This expectation has contributed to higher financing levels in the Eurozone over recent weeks, which the ECB is keen to avoid.

Indeed, the ECB are clear that a more appropriate time for such a move would be in 2024, viewing the spike in inflation as a strictly temporary phenomenon.

“We expect the ECB President to argue that the current acceleration of inflation will not persist,” says Silvia Ardagna, an economist at Barclays.

Barclays expect the ECB to talk down current market pricing, “extinguishing any hope of narrowing rate differentials to support the euro higher”.

If the Euro has found support from a recalibration in market expectations it stands that it could weaken if the ECB strikes a convincingly ‘dovish’ tone.

However, if at least some of these expectations persist following the meeting then the Euro could rally.

“We think the ECB will continue to favour extended monetary accommodation, with policy rates at current levels for longer than currently priced and a large and flexible QE programme in 2022,” says Ardagna.

Research from Nordea Bank shows that core inflation is only really likely to reach the ECB’s target levels (2.0% and above) in 2023, which would be more or less consistent with the ECB’s current guidelines.

This should provide the ECB the ammunition to push back the market’s recent unwelcome pricing.

Anders Svendsen, Chief Analyst at Nordea, finds Eurozone headline inflation will peak in the coming months but is then expected to decline substantially in the winter months when Nord Stream 2 starts to operate, easing the pressure on energy prices.

“The higher inflation expectations, which are now prevailing in the financial markets but have also gathered pace among companies and consumers, have the potential to lift nominal wage growth and hence make inflation more likely to remain around the inflation target in a kind of “positive” second-round effect,” says Svendsen.

How the ECB acts in contrast to other central banks matters for currency moves.

“A largely status quo ECB stands in contrast with global central banks looking to normalise,” says Marek Raczko, a strategist at Barclays.

The Bank of England is one such central bank that has signalled a clear intention to act sooner rather than later on normalising rates, fearing that the current surge in inflation caused by rising fuel prices and supply constraints could become embedded elsewhere in the economy.

“EUR/GBP was falling even before interest rates moved in favor of the UK. This likely reflects ongoing euro-area weakness, where energy concerns and China growth challenges have hit the region and hence the currency. Regardless, the combination of these forces has set up the possibility that EUR/GBP could plumb new post-Brexit vote lows,” says a strategy report from CME Group released on October 26.

Written by Gary Howes

Source: PSL

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Pound Sterling to Stabilise Alongside Gas Prices and Broader Market

The Pound Sterling will likely remain under pressure for as long as the UK’s energy crisis and a global stock market sell-off continues, but any signs of stability in these markets will prove supportive.

The UK currency is proving to be one of the most vulnerable of the world’s major currencies to a surge in gas prices that not only threatens to cut off UK consumers but also severely hamper UK industrial output.

This is because the UK is unique in its heavy reliance on gas for electricity output, while a government cap on energy prices distorts the market and leaves many small utility providers unable to operate.

Four energy companies have had to cease trading in the past four weeks alone while the high gas price means Carbon Dioxide production at one of the country’s largest producers has stopped.

Fears for an already under pressure UK supply chain have risen in response, positin severe headwinds to the UK economy just days ahead of a Bank of England meeting.

The price for UK gas scheduled for delivery in October surged 16% on Monday, after Russia capped additional flows to Europe.

Russian state supplier Gazprom opted not to send more gas to Europe via Ukraine in October, according to the results of an auction on Monday, according to reports.

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The Telegraph says there were also signs that Russian flows via the key Yamal-Europe pipeline will remain limited, with traders booking just a fraction of the capacity offered to flow gas next month into Germany via the Mallnow compressor station.

The newspaper says that with just a few weeks to go before the start of the heating season, storage sites are less than 72% filled, the lowest level for this time of year in more than a decade.

The Pound-to-Euro exchange rate fell to two-week lows at 1.1630 while the Pound-to-Dollar exchange rate fell to a one-month low at 1.3640.

For investors the is difficulty in interpreting what the surge in gas prices presents the Pound: one the one hand it implies higher-for-longer inflation, which should affirm market expectations for an early-2022 interest rate hike.

These rate hike expectation has provided support to Sterling over recent weeks.

But on the other hand higher gas prices pose a significant headwind to consumer spending as well as industrial production, all of which argues for an interest rate rise at the Bank of England to be kicked into the distance.

Such a reappraisal by markets would weigh on the Pound.

Indeed, the market is currently betting on the latter, expecting sufficient economic headwinds to push the Bank into a delay.

The gas crisis comes just days before the Bank of England’s September policy meeting scheduled for Thursday, where any warnings over the outlook for UK economic growth could be interpreted as a ‘dovish’ signal for Pound Sterling.

“The pound could be weighed down as we expect the BoE (Thursday) outcome to lean against market pricing,” says Eimear Daly, an analyst at Barclays.

“BoE inaction and no fiscal tailwinds limit GBP upside, but we remain constructive medium term given GBP undervaluation,” adds Daly.

The UK economy is currently facing significant supply challenges, as is much of the global economy, but the supply of energy is now looking to be the most acute.

We reported last week that an energy crisis was looming in the UK given the severe gas supply constraints in Europe, the UK’s main source of imported gas.

Tightening gas supply has meanwhile been exacerbated by a protracted period of settled weather in the UK which has left the country’s wind farms contributing as little as 3.0% to the country’s overall electricity output.

“We retain our caution on GBP given the headwinds to growth from supply constraints, withdrawal of government support schemes and higher taxation. The market is already priced for two rate hikes in 2022 so the risk is that data ends up making ‘tightening too frightening’ as our economists like to say,” says Daragh Maher, Head of Research, Americas, at HSBC.

HSBC say a run of economic activity disappointments from the UK have been reflected by their economic activity surprise index, which has turned sharply lower lately.

“Growth momentum is not simply faltering, it is slowing more acutely than expected,” says Maher.

Further growth disappointments become more likely given the energy market crunch.

The Pound’s domestic woes are meanwhile exacerbated by an ongoing drawdown in global equity markets as cautious investors opt to liquidate exposure to high risk assets, instead opting for safer plays.

The British Pound tends to fall in value against the Dollar, Euro, Franc and Yen during times of substantive stock market declines, a function of investor demand for safe haven assets.

To highlight this dynamics it must be recalled that the lowest values reached in the Pound-Euro exchange rate were not during bouts of peak Brexit uncertainty, but instead during the stock market sell-offs witnessed in 2008 (global financial crisis) and 2020 (Covid crisis selloff).

Global stock markets and commodities fell at the start of the week while ‘safe haven’ currencies found demand after China’s Evergrande Group was seen heading for default, with little indication Chinese authorities would provide a lifeline.

The mega developer has two interest payments due to bondholders on Thursday, one for $83.5MN and one for CNY 232MN.

“China risks abound with eyes on the Evergrande contagion. Markets also have one eye on inflation and the Fed meeting this week, plus the German election coming on Sunday. Many people – most investors seemingly – have been eyeing a correction in Sep/Oct after such a solid ramp this year and they’re getting one,” says Neil Wilson, Chief Market Analyst at Markets.com.

Investors are fretting that a collapse at Evergrande would have negative effects for other Chinese and global stocks, as well as Chinese economic growth more generally.

The crisis is just the latest setback to Chinese economic growth that has routes in a wider crackdown by authorities on technology stocks and the introduction of Covid-19 restrictions in some key regions and cities.

“Sterling is facing twin headwinds from the rush to safety in the greenback and sliding global stocks that weigh on risk appetite and squeeze the UK currency,” says Joe Manimbo, Senior Market Analyst at Western Union.

How much further Sterling declines therefore could rest with how soon global investors refund their confidence.

“If you have the Fed post max-accommodation – that is, on a path to tightening not loosening, inflation sticking around much more than optimists had thought, earnings growth stalling, and the economy past peak growth, you have the kind of perfect powder keg for a pullback and Evergrande may be the spark to set it off,” says Wilson.

“Add to that a German election and an energy crisis in Europe and it is not the ideal backdrop for risk,” he says.

One market analyst we follow says global markets are likely to remain under pressure over coming days, which spells for further weakness into the Bank of England’s Thursday event, if correct.

“Given the strength of this move to the downside it looks like we have at least a couple days more of selling to go before any kind of counter-wave develops,” says Chris Beauchamp, Chief Market Analyst at IG.

Written by Gary Howes

Source: PSL

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Sterling sinks to 5-month low as investors seek safety on “Freedom Day”

The British pound hit its lowest since February on Monday as global markets turned cautious over a surge in coronavirus infections, meaning that riskier currencies lost out to the safe-haven dollar.

Risk-aversion ruled the day as bond yields dropped and stocks faced their longest losing streak since the pandemic first hit global markets 18 months ago.

The wary moves coincide with Prime Minister Boris Johnson lifting most COVID-19 restrictions in England in what some have dubbed Freedom Day. Johnson has urged the public to remain cautious as infections in Britain are surging.

Last week, the pound had its worst week in a month versus the dollar. The downward turn continued on Monday with sterling hitting $1.3663 at 1455 GMT, its lowest since Feb. 4.

At 1511 GMT, cable was down 0.6% on the day at $1.36795. Versus the euro, the pound was down 0.6% at 86.3 pence.

Neil Jones, head of FX sales at Mizuho, said that the losses in the pound were caused by investors liquidating their long positions.

“The pound was one of the real darlings of the foreign exchange market for a number of months now,” he said, citing Britain’s speedy vaccine rollout as a driver of gains earlier in the year.

“Since that time there have been developments, some doubts… Market participants would not argue with the success of the vaccine because it has been highly successful but just the variant data does seem to be surging on a global basis.”

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The pound’s status as a risk-sensitive currency means that it faces the potential double whammy of being hurt by rising COVID-19 infections globally, and in the United Kingdom specifically, he added.

Britain has the seventh highest death toll in the world and is forecast to soon have more new infections each day than it did at the height of the second wave of the pandemic. But it is ahead of its European peers in terms of vaccine rollout.

“I think the pound is basically being influenced by general risk appetite as opposed to anything specifically geared towards the UK itself,” said Ned Rumpeltin, head of European currency strategy at TD Securities.

Positioning data showed that speculators’ net long position on the pound – bets that the pound will strengthen – was cut to its smallest since January 2021, in the week to July 13.

CFTC https://fingfx.thomsonreuters.com/gfx/mkt/jznvnojaypl/CFTC.png

Last week, two top Bank of England officials surprised investors by suggesting monetary policy might be tightened sooner than expected.

But BoE interest rate-setter Jonathan Haskel said on Monday reducing stimulus was not the right option for the foreseeable future, despite rising inflation.

By Elizabeth Howcroft

Source: Investing

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The pound retreats after hitting three-year high amid variant concerns

The pound retreated this morning after reaching a fresh three-year high versus the dollar amid economic recovery hopes.

Well into the London session after the bank holiday weekend, sterling reversed its course to fall 0.2 per cent to $1.4183.

The pound edged lower as concerns over a new coronavirus strain outweighed increasing investor optimism on the UK’s economic recovery.

Three-year high

Sterling touched its highest level since April 2018 of $1.4250 during the Asian session against the dollar.

Analysts attributed the rise to positive global investor sentiment towards Britain’s economic recovery.

“Overseas investor sentiment generally is positive towards sterling given the vaccine roll-out and the reopening of the domestic economy,” said Neil Jones, head of FX Sales at Mizuho Bank.

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“The stage is set for the pound to push higher I would suggest.”

Optimism remains high

UK house prices jumped by an annual 10.9 per cent in May, the most in nearly seven years, mortgage lender Nationwide revealed this morning.

Jones said that the house price data, which surprised in the upside, helped to keep optimism around the British currency.

Economic indicators including retail sales and employment measures are also looking up, as well as a deluge of new orders driving a record increase in British manufacturing last month.

Sterling also found support from Bank of England policymaker Gertjan Vlieghe last week, who said the central bank was likely to raise rates only well into next year.

By Damian Shepherd

Source: City AM

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Sterling jumps following BoE’s decision to hold interest rates

The pound rebounded this afternoon as the Bank of England announced it would leave interest rates unchanged.

The currency saw its biggest fall in three weeks this morning as traders nervously waited to see whether the BoE would formally endorse negative interest rates.

The Prudential Regulation Authority’s analysis found the UK would need six months to prepare for negative rates as anything sooner would risk incurring “increased operational risks”.

The bank’s Monetary Policy Committee (MPC) unanimously voted to keep rates at 0.1 per cent and its bond-buying programme at £895bn.

Sterling welcomed the central bank stepping back and returned cable to $1.367 while two-year yields jumped from 0.1 per cent to 0.05 per cent.

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Against the euro it moved from a 0.2 per cent decline to a 0.6 per cent rise to reach a nine-month high of €1.141.

“This was primarily because traders know that negative interest rates are not going to become a reality,” Naeem Aslam, Ava Trade’s chief market analyst. “This particular fact was holding Sterling from further appreciation. Now, it is pretty much clear that negative interest rates are not going to come into daylight. Hence the path of the least resistance for the Sterling is skewed to the upside.”

But the bank did not rule out negative rates entirely, hinting they could be used in the future should conditions warrant them.

In a statement the BoE said it was expecting a rapid recovery in GDP towards pre-pandemic levels in 2021, led by the UK’s vaccination programme. However it cautioned the outlook for the year remains “unusually uncertain”.

“It depends on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments”, the nine-strong MPC added.

By Angharad Carrick

Source: City AM

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Sterling struggles to regain 2-1/2-year peak as new lockdown weighs

The British pound steadied on Tuesday but held well below a more than 2-1/2-year high of $1.37 hit in the previous session, as a new lockdown deflated optimism from a post-Brexit trade deal with the European Union.

Prime Minister Boris Johnson ordered England into another national lockdown to contain a surge in COVID-19 cases that threatens to overwhelm parts of the health system before a vaccine programme reaches a critical mass.

The new measures, which could cost about 10% of economic output for as long as they last according to some analysts, deflated any lingering bullishness around the British currency and sent it tumbling 1% from its highest levels since May 2018.

“The pound has failed to display much of a relief rally in the wake of the pre-Christmas trade deal between the UK and the EU, with the rise of COVID-19 cases and greater restrictions on the UK economy becoming a concern,” Rabobank strategists said.

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In late London trading, the pound was changing hands at $1.3593, up 0.3% versus a broadly weaker dollar. Against the euro, the pound was broadly flat at 90 pence.

The expected hit to the economy heaped expectations on the Bank of England to announce more policy easing.

Money markets now expect the central bank to cut benchmark interest rates as early as May, compared with an August estimate just after the Brexit deal was struck.

The pound had strengthened against both the dollar and euro after the Dec. 24 Brexit trade deal, which set rules for fishing, agriculture and other industries.

But despite the pound’s gains in recent days, market participants are not bullish on the currency’s prospects. Net long bets on the pound against the dollar are a fraction of what they were at their 2020 highs.

Moreover, though bullish pound bets have registered a fourth consecutive week of gains, the size of the gains in the latest week is far smaller than previous weeks.

Reporting by Saikat Chatterjee

Source: UK Reuters

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Sterling weakens against euro as post-Brexit deal rally falters

The pound weakened versus the euro on Britain’s first day of trading outside the European Union, but strengthened against a softer dollar, climbing above $1.37 for the first time since May 2018, as traders weighed up Brexit relief with COVID-19 risks.

The pound had strengthened after a last-minute Brexit deal was agreed on Dec. 24, which set rules for industries such as fishing and agriculture.

Although the deal does not cover Britain’s finance sector, UK market participants were relieved by an extension which allows them to use platforms in the European Union for swaps trading until March 2021 – a move announced on Thursday in a bid to avoid disruption.

At 0840 GMT on Monday, the pound changed hands at 89.77 pence per euro, down around 0.5% on the day.

Versus the weaker dollar, the pound was up 0.2% at $1.3682, having briefly crossed the $1.37 level for the first time since May 2018 early in the European session. The pound gained 2.5% overall against the dollar in December.

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Commerzbank’s head of FX and commodity research, Ulrich Leuchtmann, said that sterling’s recovery after the Brexit deal was agreed was “disappointingly limited”, but that it has further scope for gains in the next few days as traders adjust their positioning upon their return from holiday.

Leuchtmann was less bullish on sterling’s longer-term outlook, however.

“For market participants with a long-term outlook the concern that Brexit might constitute the beginning of renewed economic decline in the UK is more likely to dominate,” he said.

Sterling-dollar implied volatility gauges with one-month and three-month maturities, which spiked in December and then fell when the Brexit deal was agreed, have edged up again in the past few days, suggesting traders still expect price swings.

In bad news for sterling, COVID-19 cases in Britain are at record levels. Prime Minister Boris Johnson said on Sunday that tougher lockdown restrictions were probably on the way.

RBC Capital Markets analysts wrote in a note to clients that negative interest rates are likely to remain a possibility for the UK because, although a chaotic no-deal Brexit has been avoided, rising COVID-19 infections will have an impact on the Bank of England’s outlook for the economy.

Market participants are pricing in negative rates in the UK by May 2021.

Reporting by Elizabeth Howcroft

Source: UK Reuters

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Pound traders brace for tense week as Brexit talks continue

Sterling traders are gearing themselves up for another nervy week amid fears that a collapse in Brexit talks could spark a sharp sell-off in the pound.

Negotiations are ongoing, but noises from both camps suggest they remain stuck on fishing rights and competition policy.

British health secretary Matt Hancock this morning told Sky News that the European Union was making “unreasonable” demands.

France appears to be taking a tough stand on fishing rights, arguing that it will not take a sub-standard deal.

The pound is currently trading at around two year highs of around $1.35. Yet it slipped back from even higher towards the end of last week as doubts about a Brexit deal emerged.

No-deal Brexit: Pound could hit $1.15 or lower

Economists at consultancy Capital Economics said last week that the pound could tumble to $1.15 in the event of a no-deal Brexit.

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Such an outcome would lead to disruption for businesses as well as higher tariffs for certain sectors. The UK’s budget watchdog has said it could knock two per cent off the economy next year.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said no deal could see sterling fall to $1.23. He said it could fall to about €1.04 against the euro, from its current price of €1.103.

Nomura currency analyst Jordan Rochester said the pound could even plunge to $1.01 in a worst-case scenario where “capital markets struggle to function” amid financial disruption.

However, Tombs said the pound was “less vulnerable” than in 2016, when it dropped sharply after the Brexit referendum.

He said it is now less dependent on external finance thanks to a lower current account deficit. And he said the Bank of England also has less scope to cut interest rates, which would hurt the pound.

Analysts and investors are torn on whether the UK and EU will reach a deal. Analysts at UBS said that if a deal is struck and vaccines aid the economy then sterling could hit $1.37 by the end of 2021.

By Harry Robertson

Source: City AM

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FTSE 100 falls and pound plunges as Tier 4 lockdown puts UK economy back into hibernation and Brexit talks drag on

The FTSE 100 was set to fall nearly 1% in early trading today as sterling plunged following Boris Johnson’s shock U-turn on Covid-19 lockdowns at the weekend.

The sudden and dramatic change of government rules over swathes of the South East wrongfooted investors and chief executives alike, sending early calls on the FTSE down 54.6 points to 6462 on the IG Index spread betting platform.

That fall would have been deeper were it not for sterling also plunging – a factor that generally helps FTSE shares because big company earnings are largely generally in dollars, so a weak pound makes them stronger when translated back into pounds.

The pound fell 1.2% this morning during Asian trading with both the lockdown measures and continuing stalemate on the Brexit trade talks hitting the market’s view of Britain’s economic prospects.

The pound fell to $1.3360, further pressurised downwards by dollar strength on the back of a deal from Washington politicians over a $900 billion covid stimulus deal to boost the US economy.

Relief that a deal had been struck after so many months of stalling negotiations meant markets could now focus on Brexit trade talks and the West’s varying response to Covid.

As borders closed to UK travellers over fears of the British mutant strain of the disease, share prices were expected to plunge as trade was set to be jammed at UK ports.

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Freight transport was already backing up badly at Dover on Saturday due to traders’ attempts to stockpile ahead of the end of the Brexit transition period next week, but that was worsened by border stops by Germany, France, Italy, Belgium, Austria, Ireland and the Netherlands.

Dover usually handles 10,000 trucks a day but France yesterday put an immediate 48 hour ban on entry, jamming the crucial Dover-Calais route.

Half of all goods traded between the UK and EU and 90% of truck traffic cross on that route.

The hope is that the EU will have formulated a response to the UK mutant virus by tomorrow, involving Covid tests prior to departure from Britain.

While hauliers were still allowed to enter the UK, truck companies from the continent were delaying shipments for fear that they may not be allowed to return.

Eurotunnel, Port of Dover and Eurostar all shut the UK-France route yesterday.

Shares in easyJet, British Airways owner IAG and Ryanair were all expected to fall sharply, along with hoteliers such as InterContinental and Premier Inn owner Whitbread.

However, investors with longer term horizons still believe the vaccines will make 2021 a strong year for economic growth and company profits, so any short-term share price falls are likely to be leaped upon by bulls seeking bargains.

Further concerns over TalkTalk’s lowball takeover by Toscafund were heightened today as The Times revealed that the hedge fund had told its investors in the summer that it would make strong returns on its investment in the firm at a far higher price than it is offering to buy it for.

By Jim Armitage

Source: Evening Standard

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Pound lingers above 10-day lows as Brexit talks enter crunch week

The British pound held above a 10-day low on Monday as investors cut their holdings with British and European negotiators scrambling to salvage post-Brexit trade talks.

British Prime Minister Boris Johnson said on Friday there was no point in continuing talks and it was time to prepare for a ‘no-deal’ exit when transitional arrangements end on Dec. 31 while the European Union said Britain needed to give ground.

EU chief negotiator Michel Barnier had been due in London for talks with his British counterpart David Frost this week. Instead, they will now speak by telephone on Monday to discuss the structure of future talks.

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With only 11 weeks to go before the end of the transition period, Berenberg economists estimate the probability of a hard Brexit at as much as 50% with both sides taking steps to soften the blow on their respective economies.

“We thus have to watch carefully the risk that neither side blinks and, in the end, the two sides finally part ways without a deal,” they said in a note.

Against a broadly steady U.S. dollar, the pound edged 0.2% higher at $1.2936 hovering just above a Oct. 7 low of $1.2860 hit on Friday. Against the euro, the pound weakened 0.3% to 90.49 pence.

Latest positioning data for the week ending Oct. 13 showed investors have been steadily reducing their holdings in the British pound.

While the overall picture showed a small reduction in net short pound positions, the overall picture was worrying with hedge funds cutting both their bought and sold bets.

In derivative markets, one-month implied volatility gauges for the pound firmed above 11%, the highest levels in more than a month, pointing to rising uncertainty.

Source: UK Reuters

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