- Optimism rises over Brexit deal

- But GBP finds little lift

- GBP upside potential blunted by lockdown 2.0

- Lombard Odier say turning constructive on GBP

Above: Covid-19 update from the Prime Minister 02.11.2020. Image © UK Parliament/Jessica Taylor.

Market rates: GBP/EUR: 1.1085 | GBP/USD: 1.2930Bank transfer rates: 1.0875 | 1.2668Specialist transfer rates: 1.0980 | 1.2814Learn more about market beating exchange rates, hereLock in today's rate for use at a future point in coming months, here.The British Pound retreated from a seven month high against the Euro at the start of November despite news that the UK and EU are looking set to reach a mid-month deadline to reach a post-Brexit trade agreement.

The upside boost that Sterling would have typically have received from such a development appears to have however been blunted by the more economically relevant news out on Saturday that England would enter a second national lockdown, lasting from Thursday 05 November until December 02.

"The negative lockdown news flow is putting a dampener on building optimism over the likelihood of a Brexit trade deal this month," says Lee Hardman, Currency Analyst at MUFG.

The lockdown was approved by Parliament on Monday with Prime Minister Boris Johnson telling MPs there was "no alternative" to the new restrictions that would for a second time in 2020 shut down swathes of the UK economy and put thousands of jobs at risk.

Johnson said he was "right to try every possible option" before ordering people to stay at home.

The decision is expected to knock up to 3.0% off the value the UK's economy in the final quarter of 2020 and could elicit an agressive monetary policy response from the Bank of England, which could impact negatively on the value of Sterling.

The developments contrast to supportive weekend reports on Brexit that suggest a compromise is emerging on the issue of what access EU boats will have to UK fishing waters.

According to Bloomberg, the potential solution could defer crucial decisions over the exact quotas EU boats are allocated until a later date.

"A trade deal would be a welcome development as the last thing the UK and European economies need right now is even more economic disruption from a No Deal Brexit," says Hardman.

MUFG do however say the upside potential for the Pound from a trade deal is diminishing as a result of the significant deterioration that has taken place in the UK’s economic fundamentals from the COVID shock.

Above: GBP/EUR daily chart. Lock in current exchange rates for use over future months in order to protect your international payments budget. Learn more here.

The UK is expected to suffer another quarter of negative growth owing to the decision on Saturday by the UK government to place England in a one-month lockdown.

The closing of non-essential retail and hospitality businesses - amongst others - are expected to see growth fall by 3% in the 4th quarter according to analysis Oxford Macroeconomics.

"This would be a much smaller drop than that seen in the first wave. The smaller fall will be due to the lockdown being shorter and involving less stringent restrictions. The decision to keep the education sector open will be particularly important, not just in terms of its direct contribution to output but also because it will allow working parents to continue to work," says Andrew Goodwin, Chief UK Economist at Oxford Macroeconomics.

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{wbamp-hide end}{wbamp-show start}{wbamp-show end}A potential game changing event for the UK economy could be a timely emergency approval of a vaccine, a development that would boost sentiment towards the outlook for the economy. Two vaccine candidates are nearing the end of their stage three trials - the Pfizer and AstraZeneca vaccines - and both are now subject to a rolling review by the UK's Medicines and Healthcare Products Regulatory Agency.

A rolling review significantly shortens the time require for a successful vaccine to be approved, and analysts are expecting news before month-end.

Combine good news on a vaccine with a Brexit deal and a best-case outcome for Sterling emerges.

Swiss Bank Turns Constructive on Sterling

Analysts at Lombard Odier - the private Swiss bank - have told clients they are turning constructive on Pound Sterling once more, saying the odds of a post-Brexit trade agreement have increased.

"An agreement would support sterling over the next few months," says Vasileios Gkionakis, Global Head of FX Strategy at Lombard Odier. "We think the time has come to turn constructive on GBPUSD once again."

"A trade deal will be economically beneficial to both (relative to a no-deal result). Furthermore, the incentive to reach an agreement has now risen, as everyone involved would like to avoid economic disruption on top of the economic hardship inflicted by the pandemic," says Gkionakis.

Research by Lombard Odier meanwhile shows Sterling to be undervalued and it has lagged other major currencies (vs the USD) on a Year to Date basis:

Lombard Odier are forecasting the Pound-to-Dollar exchange rate to be at 1.35 by March 2021, ahead of a rise to 1.37 towards mid-year 2021.

The Pound-to-Euro exchange rate is meanwhile forecast to end the first quarter at 1.11, which is the top of a range it has been inhabiting for a number of months now.

Sterling's reluctance to rally against the Euro could well be explained by Lombard Odier's expectation for the Euro-to-Dollar exchange rate to end the first quarter of 2021 at 1.21.

A key determinant of how Sterling ends the week will likely be the Bank of England which delivers its November policy update on Thursday.

A poll of economists show an expectation for the Bank of England to boost quantitative easing by £100BN, taking the total to £845BN - any deviation away from this expectation could have implications for the Pound.

"While the BOE is not expected to chop its record low 0.1% interest rate below zero it could signal how soon such drastic policy could arrive in the face of fresh lockdowns to slow the resurgent spread of the coronavirus," says Joe Manimbo, Senior Market Analyst at Western Union.

"Reacting to a likely sharp contraction in UK economic output in Q4 as England enters a second lockdown, we expect BoE policymakers to announce further stimulus measures at the November MPC (Monetary Policy Committee) on Thursday. As our base case, we look for the nine member committee to vote unanimously in favour of an additional £100bn in asset purchases to take the BoE’s target to £845bn," says Kallum Pickering, Senior Economist at Berenberg.

Should the BoE surprise with a more aggressive response - perhaps by enlarging the quantitative easing envelope by more than £100BN - or signalling that negative interest rates are likely, the Pound would likely fall.

However, there is also a chance the BoE underwhelms, by perhaps announcing an expanded quantitative easing programme of £50BN.

"Despite some initial selling of risk assets such as equities following the news of lockdowns across Europe, financial markets remain orderly and calm. The current mood is very different from the first wave of European lockdowns in Spring when the BoE and ECB had to take aggressive emergency measures to prevent a credit crunch and financial crisis," says Pickering.

Should the BoE underwhelm, Sterling could find itself better supported ahead of the weekend.

"Helped by the BoE’s targeted policies and government guarantees, credit is flowing to the households and firms suffering cash flow shortages. UK lenders do not appear unduly risk averse in a way that could harm the transmission of monetary policy to the real economy. For now, therefore, an additional £100bn of extra asset purchases to support medium-term growth expectations should be enough. If markets begin to panic, or if the lockdown is extended into December and beyond, the BoE has plenty of options within its existing toolkit that could be deployed, enhanced or expanded at short notice," says Pickering.