Brexit strongly influences the GBP

Financial and commodity markets analytics

Market Watch review. 05.10.2020

In today's release, we’ll cover the following topics:

  • Pound sensitive to Brexit talks
  • Oil production in the USA
  • ISM Business Activity Index

Brexit, coronavirus and the upcoming US presidential elections remain the main drivers in the market. At the same time, last week the markets reacted most strongly to the breakdown of the Brexit agreements, in connection with which the European Union launched a legal proceeding against the UK. Against this backdrop, we saw an incredibly strong growth in the volatility of the GBP trading.

On Thursday, October 1, the media reported that the EU was moving from words to deeds, and at that moment the GBP/USD currency pair fell by 130 points. But the subsequent announcement from Boris Johnson that the parties were able to reach an agreement brought the pair back above session highs, fully compensating for the losses. Therefore, only further successes in the Brexit negotiations and the general weakening of the USD can provide the necessary support for the pair to break the technical resistance level at 1.3000.

Now let's move on to the commodity markets. It's no secret that the cost of oil production in the United States, when it comes to shale oil, is very high. Therefore, since the beginning of the year, the number of active drilling rigs in the United States has decreased by more than three times, while the volume of oil production has decreased by about 20% and only due to an increase in the export of black gold to China, as part of a trade deal, oil production in the United States remains quite high.

Nevertheless, without a significant recovery in business activity, strengthening the stock market and further stimulating the US economy, one cannot count on an increase in oil prices. Moreover, a sell-off in the US stock market could significantly reduce investor interest in oil. Let me remind you that oil is a risky asset, therefore, at a time of uncertainty, the demand for it decreases.

Moving to the American trading session, I would like to note the forthcoming publication of the ISM composite index for the non-manufacturing sector. But only a significant decrease in this indicator can put additional pressure on the stock market, thereby strengthening the USD. Since this is an unlikely scenario, all the attention of traders and investors will be focused on the US presidential race and testing of vaccines for the coronavirus. Any resonance on these issues may affect the American currency.

Closely monitor the news background and be prepared for all the surprises of the market.