Ellie Allen

Pound Climbs as Historic Brexit Deal Agreed


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At the end of 2020 the Pound rallied following an eleventh-hour Brexit deal with the EU. Boris Johnson announced the comprehensive deal on Christmas Eve, and although volumes were light as many currency traders were away from their desks, Sterling immediately appreciated on markets. It was a few days later, when the deal gained approval in Parliament, that the Pound put in its best performance, rising to $1.36 and €1.12 against the US Dollar and the Euro.

The Brexit deal was comprehensive, covering trade, travel, security, legal jurisdiction and more. In the main it means that the two sides will not impose tariffs on one another or put in place any physical barriers. Instead, they will continue trading as usual, albeit with several limitations. The two sides will also continue negotiations about key issues such as guidelines for the financial sector, and fisheries.

The main points include:
  • No tariffs or quotas between the EU and the UK from 1 January
  • Some new border checks to be introduced, such as safety checks and added customs procedures, although this should not impact the flow of goods
  • The European Court of Justice (ECJ) will no longer have jurisdiction over the UK
  • The UK will gradually gain a greater share of the catch of fish from its waters over the next five-and-a-half years
  • Financial services companies will no longer have the automatic right to access EU markets
  • Professional qualifications gained in the UK will no longer be automatically recognised
  • UK nationals will need a visa to stay more than 90 days in the EU during any 180-day period
  • The UK does not have to comply with EU data protection standards
  • The UK will no longer be a part of the European law enforcement agency Europol
VACCINE ROLLOUT ECLIPSED BY NEW VIRUS STRAIN AND MORE LOCKDOWNS

In other UK news, a number of positive vaccine developments were overshadowed by the emergence of a new strain of the Covid-19 virus in the UK, causing many countries to block flights from Britain, and the Eurotunnel to be temporarily closed. As a direct result of this there was a tightening up of the tier system and the introduction of a new – harsher – Tier 4 which applied to London and large areas of the South East. The hospitality, retail and travel sectors immediately took the brunt of the economic disruption, although the knock-on damage to the UK economy as a whole will become apparent in Q1 2021.

Although the Pound did well against the US Dollar and the Euro, December saw it fall markedly against the Australian Dollar. In general, this was a reaction to the ongoing movement towards risk, as well as the perception that Australia had recovered from the Covid-19 crisis and was on the path back to growth. Nevertheless, on average, by the end of 2020, Sterling had appreciated by over 2 percent against its main rivals.

US DOLLAR ENDS THE YEAR ON A LOW NOTE AS IT IS BESET BY CONTINUED WEAKENING

Looking at the US Dollar Index, the greenback found little support as 2020 drew to a close, slipping to levels not seen since April 2018. A continued risk-on movement combined with more stimulus from the Federal Reserve had investors seeking higher yielding currencies at the expense of safe-havens.

Another factor hitting the Dollar in December was a political standoff over funding for a coronavirus relief package, which included money transfers to individuals. The Covid Relief Bill amounts to $892 billion and would see every US citizen being handed a cheque for $600. President Trump said he wanted to see that figure expanded to $2,000, saying that $600 was “ridiculously low”. When he eventually backed down and signed the bill, US stock markets were propelled to new highs, although the Dollar didn’t fare so well, with the DXY Dollar Index slipping below 90 for the first time in over two and a half years.

Against the Pound, the Greenback continued its inexorable slide from £0.75 to £0.73 over the course of December.

EURO CONTINUES TO STRENGTHEN ON DOLLAR WEAKNESS AND BREXIT DEAL

The Euro strengthened in December against its major rival, gaining 2 cents against the US Dollar before falling back again. In fact, the single currency ended 2020 on a high note, having gained more than 9 percent against the greenback over the course of 12 months, finishing on $1.21.

News that the US Senate had delayed a decision on increasing coronavirus relief payments was seen as the main driver for the Dollar falling back, although the Brexit deal also added to Euro strength as it finally gave traders a clear signal as to the nature of the new trading relationship between the EU and the UK.

Although the Brexit deal helped the Euro fare better against global currencies, it actually hindered it against the Pound, with the UK economy being seen to have benefitted more from the deal than the Eurozone. This caused the GBP/EUR exchange rate to appreciate over the course of December, and the Pound was able to advance from €1.11 to €1.13.

There may be more economic pain ahead for the Eurozone as the new strain of Covid-19 which was discovered in the UK is also spreading across Europe. France has instigated a new national lockdown, as has Germany, and other countries could soon follow suit, with implications for the speed of the economic recovery. Nevertheless, European Commission President Ursula von der Leyen remained upbeat about the Eurozone’s near-term prospects, saying, “We are starting to turn the page on a difficult year. Vaccination is the lasting way out of the pandemic.”

Whilst the Euro generally strengthened in December, against the Pound it remained mostly rangebound at £0.90, slipping to £0.89 by year-end.

AUSTRALIAN DOLLAR SURGES INTO 2021

2020 proved to be a good year for the Australian Dollar which rose by almost 10 percent against its rivals, making it one of the best performing currencies in the world. There were two driving factors behind this performance, namely surging risk appetite following the initial Covid-19 related lockdowns, and roaring commodity prices spurred on by strong demand from China.

Furthermore, the Aussie took advantage of a weaking Greenback, and signs that the Australian economy was bouncing back led to expectations that the Reserve Bank of Australia could become more hawkish in 2021. This allowed the Australian Dollar to gain the upper hand over the Pound in December, rising from £0.55 to £0.57.

Viewed the other way around, the Pound fell back against Australian Dollar in December, falling from AU$1.82 to AU$1.78.

WHAT TO LOOK OUT FOR IN JANUARY

The early part of this year will likely be dominated by the rollout of the various Covid-19 vaccines around the world and the resumption of economic activity on a country-by-country basis. This will provide a driver for currency movements, with a clear bias towards greater risk-seeking, which should benefit the Pound. The speed of approval and vaccine uptake levels will undoubtedly provide guidance for currency valuations. At the same time, the effectiveness of stimulus packages unleashed by the European Central Bank, the Federal Reserve, the Reserve Bank of Australia and others will determine short term currency movements as the data rolls in.

Nevertheless, there is the potential for a global risk event as soon as this week, as a number of US senators have called for an investigation into last year’s presidential election before votes can be cast by the Electoral College. Whether this means a delay in the inauguration of a new president is as yet unknown, but as things stand Joe Biden is due to take over at the White House on 20 January. Any potential hiccup here could reverse the Dollar’s recent decline.

The Q1 2021 GBP/EUR bank averaged forecast is €1.13, while the forecast for GBP/USD is $1.36.

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