GBP/USD falling in largest monthly drop since March

GBP/USD is down some 5.7% for the month of September alone, its largest monthly drop since March of this year with 8 days and 4 hours still left to go. 

At the time of writing, GBP/USD is trading at 1.2731, down some 0.65% on the day so far having lost its footing at 1.2867 resistance, falling to test 1.2710.

USD making a come back

The US dollar has been made a fresh daily high, breaking up from consolidation in the DXY to test the 94 area as risk appetite take a turn for the worst in the last full week of the trading month.

There are a number of factors in play.

On the US dollar side, the Fed reiterated its low-for-longer stance without providing further stimulus. We also have the US elections drawing near. 

Investors, that have thrived on US stimulus, have been less committed to risk as the uncertanty over the spread of the virus and the deadlock between lawmakers has stalled much needed additional stimulus.  

Technically, equities have exhautsed the upside and as a result, the US dollar has collected a safe haven bid.

Hard Brexit risks

On the GBP side, the EU-UK stalemate on trade talks has expectedly hit the sterling.

Doubts have been cast over the negotiations since the publication of Downing Street’s Internal Market Bill.

The bill is intended to hand ministers the powers to overwrite EU rules in Northern Ireland as part of the post-Brexit fix to avoid a hard border.

EU Commission vice-president Maros Sefcovic said he would meet senior British minister Michel Gove — just ahead of an end-of-the-month deadline from Brussels for the UK to abandon the Internal Market Bill.

EU lawyers are separately drawing up plans to haul Mr Johnson in front of the European Court of Justice unless he amends his Brexit Bill.

Since there is so little time before the end of the transition period and given the UK government’s commitment to putting sovereignty at the forefront of its negotiations, scope for any agreements between the EU and the UK in trade would appear diminished.

This suggest that GBP losses could extend further dependent on the outcome of the EU/UK trade talks,

analysts at Rabobank explained. 

COVID-19 and negative rates

Coupled with the hard Brexit risks, investors fear a wide spread lockdown in the UK.

The second wave of COVID-19 clashing with the regular flu season has negative implications for social behaviours, consumer confidence and spending.

Then, there is the added risk of negative interest rates as the Bank of England recently confirmed that it would continue to review the appropriateness of NIRP.

GBP/USD levels