Ellie Allen

Pound Strengthens Against Dollar as EU Exit Looms


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Pound/US Dollar (GBP/USD) rises to $1.34

Pound/Euro (GBP/EUR) steady at €1.11

Pound/Australian Dollar (GBP/AUD) slips to AU$1.80

There has been a significant strengthening trend for the Pound over the last month, despite the negative headlines about store closures and job losses. The driving force behind this was news that the UK had developed a vaccine against Covid-19, as well as having been the first country to approve the Pfizer jab. In addition to this, as the Brexit transition period draws to a close, markets have chosen to believe that a final deal will be hammered out at the last minute. This added up to a lot of positive sentiment for the Pound, allowing it to break higher against the US Dollar at $1.34, a three-month high.

POUND NEWS: ALL EYES ON FINAL BREXIT NEGOTIATIONS AS CLOCK RUNS DOWN

There was plenty in the news over the last month that should have had an impact on Sterling, but the real driving force was Brexit. Soaring optimism about a potential trade deal saw the Pound lifted higher, while a resurgent global appetite for risk in the wake of vaccine developments saw numerous currencies swept higher, including Sterling.

This positive news wasn’t even offset by domestic economic developments, which saw Sir Philip Green’s Arcadia retail empire teetering on the verge of insolvency. The High Street chain includes famous brands such as Burton, Dorothy Perkins and Laura Ashley, and some 13,000 jobs would be at risk if it succumbs. This came as the second Covid-related national lockdown drew to a close, to be replaced by a system of regional tiers. There are fears of further job losses, especially in hard-hit sectors such as hospitality and travel.

As we head into the final few weeks of the transition period to leave the EU, the main focus for markets is on the day-to-day Brexit developments. At the time of writing, PM Boris Johnson was heading to Brussels for crunch talks with European Commission President Ursula von der Layen. The UK is set to stop following EU trading rules on 31 December, so any announcement of a trade deal being reached will likely send the Pound significantly higher.

US DOLLAR CONTINUES TO SLIDE – HITS 30 MONTH LOW AS RISK APPETITE RETURNS

Now that the US presidential election is over, and Democratic challenger Joe Biden was deemed to be the winner, markets have adopted a generally ‘risk on’ view. This means traders have assessed global conditions to be more stable and are buying up currencies in which they can earn a higher return. What’s more, the announcement that several Covid-19 vaccines have been developed added to the sense that things could get back to normal soon, adding to the increased appetite for risk and reward. The Pound usually does well during such times, but the Dollar – which is a safe haven – usually does badly. In other US Dollar news, America’s central bank, the Federal Reserve, indicated it was not happy that President Trump was winding down a massive economic stimulus package. The $455bn pile of credit had been earmarked for business relief in the wake of the Covid-19 response, but Mr Trump said the US economy no longer needed it. Federal Reserve chief Jerome Powell disagreed, claiming the economy was too weak and igniting speculation the Fed may soon respond by cutting interest rates, even though they are at almost zero. This had the effect of further weakening an already weak Dollar.

EURO RISES AS DOLLAR SLIPS BUT CONCERNS REMAIN ABOUT WEAK EUROZONE

Over the last month the single currency has strengthened as the US Dollar – its main rival – has weakened. Riding on a wave of optimism following the Covid-19 vaccine news, the Euro hit a thirty-two-month high against the struggling Greenback. This means the Eurozone currency has reversed the losses it sustained in October.

The Pound wasn’t really able to gain much of an advantage over the Euro, despite rising higher itself, as the two currencies rose in tandem with one another on Forex markets. There were concerns that the Eurozone’s two largest economies – Germany and France – could enter into a double-dip recession as Covid-19 lockdowns rumbled on. If they were to do so the entire Eurozone would likely follow suit, potentially limiting the Euro’s recent bullishness.

Meanwhile, the Brexit deadlock has also been lying heavy on the Euro with concern that there may be trade disruptions if no deal is reached in time. The European Central Bank is wary of any disruption having a knock-on effect in the Eurozone and has hinted that it may release more stimulus measures in the near future. If this happens, we can expect to see the Euro strengthen further.

POUND SLIPS AGAINST AUSTRALIAN DOLLAR AS INVESTORS HUNGER FOR RISK

The Pound broke higher against the Australian Dollar towards the end of November but has since fallen back again and is currently trading at round AU$1.80. This is slightly weaker than it was a month ago, but the Aussie has been doing well as risk appetite has surged.

There was a sharp drop in new Covid-19 cases in Australia, fuelling sentiment that internal border controls and other restrictions could soon be lifted. At the same time, economic data tended to beat forecasts, with both employment numbers and consumer confidence bettering expectations, indicating a return to economic normality could soon be on the way.

WHAT TO LOOK OUT FOR IN THE COMING WEEKS

For the rest of the year there’s only really one story as far as the Pound is concerned, and that is of course Brexit talks. With negotiations on a knife edge, whatever the result is by 31 December will almost certainly send the Pound either sharply up or sharply down. After four and a half turbulent years since the vote over whether to remain in the EU, the looming deadline to leave is only weeks away. Volatility is to be expected as we head into the New Year, especially if a no-deal Brexit is on the cards.

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