GBP/USD: Rising COVID-19 risks put a dampener on Brexit deal optimism – MUFG

Brexit deal optimism is helping to lift the GBP/USD pair back towards the 1.3000-level after hitting an intra-day low of 1.2676 at the end of last month. However, the sharp rise in UK COVID-19 cases is set to trigger renewed restrictions, dampening the good mood, as per MUFG Bank. 

Key quotes

“Bloomberg has reported that in private, officials are more upbeat over the likelihood of reaching a trade deal despite the UK government’s continued public threats to walk away from talks if a deal is not reached by the 15th October while the EU has dared Boris Johnson to walk away if he views a deal as impossible. According to the Bloomberg report, officials in Brussels with knowledge of the negotiations suggest an elaborate choreography is being worked out, in which, despite some level of differences remaining, both sides will find a way to carry on discussions into the second half of October. The upcoming EU Summit on 15th and 16th October is viewed as more of a ‘stock-taking exercise’ which won’t get in the way of negotiations.”

“The improving mood music surrounding the Brexit talks is encouraging a stronger pound. However, the upside potential for the pound from Brexit developments is being dampened by negative COVID-19 developments in the UK. The sharp rise in COVID-19 cases particularly in the North of England and London is increasing the risk of tighter restrictions being re-imposed in the coming weeks and months that could deliver a more significant setback to the economic recovery.” 

“The more severe the lockdown becomes the more likely positive Brexit developments will be overshadowed.”