GBP has been biggest decliner

Cable dropped back to the low 1.2700s after rallying to a 3-day high at 1.2806. EURGBP concurrently lifted as Cable dipped, though the cross remains net lower on the day.

The Bullish case for Sterling, that it is fundamentally undervalued, and is hinged on the EU and UK striking a reasonably comprehensive trade deal next month, remains a weak one under prevailing circumstances and risks. There is a palpable risk that only a bare bones deal will reached by the EU and UK, and a possibility that the UK will leave the single market at year-end with no deal at all.

In either of these scenarios, negotiations would continue next year, so the matter won’t be closed, but the near- to medium-term impact on the UK could be significant. There is a view that PM Johnson has no intention of leading the UK out of the EU’s single market without a deal and reneging on the Withdrawal Agreement, given the significant economic and political cost it would entail.

This view has been, at least up until now, preventing the Pound from seeing more extensive losses. However, it should be remembered that Johnson’s cabinet is loaded with Brexit ideologues, and the EU is not likely to accept the unilateral overwriting of the Withdrawal Agreement.

The controversial Internal Market Bill (which proposes legislation that overwrites parts of the Withdrawal Agreement) remains in process in the UK’s parliament, and passage through the House of Lords remains a potential obstacle. Aside from Brexit, there a surge in new Covid cases and the associated new restrictions and localised lockdowns (which currently affect 15 mln people). The modified wage support scheme has been a relief, though is much more frugal and targeted than the furlough scheme, which expires next month. The Chancellor, Rishi Sunak, warned that it will not stem rising unemployment in the UK, and warned the country faces a winter of business failures due to the impact of Covid restrictions.