European update – Markets continue to recover

Is the sell-off over or just getting started?

Onwards and, hopefully, upwards is the collective feeling in the markets on Thursday as investors bid farewell to red October and welcome a new month that will ideally be more positive.

The final day of the month was far more positive than the 22 days, or so, that preceded it which many will hope is a sign of better things to come. The timing of this sudden shift was curious, with some suggesting it may have been more a case of month end moves, perhaps some portfolio rebalancing, but I guess that will become more clear in the coming days. The early signs are good though with strong gains seen across Europe, FTSE 100 aside, and US futures making steady gains also.

The FTSE 100 is being held back by the rally in the pound this morning, as a stronger pound is typically bad for the index due to companies within it making the large bulk of their profits outside the country. The inverse relationship was particularly prevalent after the Brexit vote when the slump in the currency was not only not matched by the UK index but actually drove strong gains.

Sterling rallies on Brexit deal on financial services

The pound is on a tear higher on reports that the UK and EU have agreed on a deal that would give UK financial services companies continued access to the EU after Brexit. This comes following reports on Wednesday that Dominic Raab – Brexit Secretary – expected a Brexit deal by 21 November, although this date was later described as more of an aspiration than an expectation, which would suggest negotiations have accelerated since the meeting in October, when the prospect of a special November EU summit was dashed.

GBPUSD Daily Chart

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Assuming all of these reports are correct, this is a huge step forward for negotiations which is why the pound is looking so bullish. Sterling is up more than 1% on the day and if we are finally seeing real progress towards a deal, the potential upside is huge. People have become very pessimistic on a Brexit deal in recent months which has been gradually priced into the pound, so naturally a Brexit deal should be very bullish for the currency.

BoE forecasts key on Super Thursday

It’s Super Thursday which means the pound is unlikely to move out of the spotlight as the day progresses. The Bank of England will announce its latest interest rate decision and release new economic forecasts and minutes alongside it. As was the case earlier in the week, the forecasts will be based on a number of Brexit assumptions and will more than likely be taken with a pinch of salt given that negotiations are still happening.

That said, their outlook for interest rates in the event of a smooth Brexit will be of interest, especially if forecasts are raised as they were in the budget. We’ll get more insight on this in the press conference after with Governor Mark Carney and his colleagues, which is always an eventful affair. Naturally, Brexit is the biggest driver for the pound at the moment but traders will still be keenly following this and markets will respond accordingly.

Gold rallies in risk on markets while oil sells of on oversupply concerns

The improvement in risk appetite isn’t harming Gold, which has benefited greatly from safe haven flows over the last month. This is because the dollar is under early pressure as the pound and euro rally in response to the Brexit news. A weaker dollar is typically bullish for the yellow metal as it makes it cheaper for non-dollar buyers. Today is a primary example of how Gold moves are not always straightforward and also how, despite being a traditional safe haven, it may benefit greatly from a Brexit deal.

Gold Daily Chart

Oil on the other hand is faring less well this morning, trading down around 1% and threatening to extend its losses to four consecutive days. These declines follow another inventory build on Wednesday, as reported by EIA, just as traders are becoming increasingly concerned about the prospect of an oversupplied market. Interestingly, this is not too long after prices of Brent and WTI peaked at a near four year high on the opposite concerns, with traders now fearing slower global growth and therefore lower demand.

Oil (WTI and Brent) Daily Chart

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary.

His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News.

Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.