GBP/USD: Politics on both sides of the Atlantic to weigh on the pound

The fallout from the Fed's dovishness pushed cable to new highs before falling back down. US politics are set to enter higher gear after the long weekend, and several indicators are set to rock GBP/USD in September's first full week. The fate of the furlough scheme remains in the air, FXStreet’s analyst Yohay Elam briefs.

Key quotes

“The government's successful furlough scheme is set to expire in October, and that may take the UK economy off a cliff. Rishi Sunak, Chancellor of the Exchequer, has yet to unveil how it would be wound down – or if it is extended. The program pays workers most of their salaries while they are unable to work, keeping them attached to their jobs.” 

“The transition period expires at year-end and without a new deal, Britain falls to unfavorable World Trade Organization rules. Investors are expecting no progress until the last moment. That means that any positive comment from negotiators could spark a rally in sterling, while mutual accusations would likely be shrugged off.” 

“BoE officials are set to speak, but after Bailey's recent public appearance, there is little the bank can add at this point. More importantly, the final read of GDP figures for the second quarter could shake sterling. The economy collapsed by 20.4% according to the initial read – worse than most developed economies at that time. While the revised figure tends to confirm the first one, this particular one may be different given the magnitude of the fall. Manufacturing output figures for July are also of interest and are expected to show an ongoing recovery from the depths of the economic paralysis in the spring.” 

“While markets tend to prefer Republican presidents, a Biden presidency with a GOP-controlled Senate – a scenario that is looking more likely – may result in less fiscal stimulus and may slow the economy. Even worse, the specter of an inconclusive election may also begin gripping markets. In that scenario, the safe-haven dollar may rise.”

“Inflation figures come into focus on Friday. The Fed's willful ignorance of price development raises the bar for a meaningful reaction, but a rise of Core Consumer Price Index to beyond 2% – currently looking unlikely – may boost the dollar.” 

“While US COVID-19 cases are falling, the mortality rate remains elevated and nears the grim 200,000 deaths milestone. A renewed focus on the disease – especially if the numbers turn upward – could weigh on sentiment.”