04/01 – Sterling bows out of 2020 on a high

Jeremy Thomson-Cook
Jeremy Thomson-Cook 04 January 2021

GBP: Covid risks remain as Brexit deal signed

EUR: Helped higher by optimism

USD: Starting the year hungover


We ended 2020 with belief that a deal on Brexit would be done, Covid-19 cancellations and closures would remain a very real depressant of economic and social activity and the pound could end on a high note. 2021 looks a lot like 2020 in its early days.

With a Brexit deal signed and agreed between the UK and the EU the hope remains that that particular batch of toxic politics comes to an end although our wider hope that politics makes less of a mark on sterling in 2021 than it has in previous years now depends largely on the UK government’s Covid-19 response.

As we wait on further clues from the government whether the UK will be put back into a tighter national lockdown or a new tier of restrictions will be announced – possibly in the next 48hrs given pressures on schools for example – sterling has opened the year largely as expected.

The news of a Brexit agreement has eliminated no-deal risk from sterling once and for all and it is clear to see just how fully priced in a deal had been – GBPEUR remains in the 1.11s – despite sterling hitting its highest trade-weighted level of the year on New Year’s Eve.

While we think it possible that the pound remains on the front foot against the beleaguered USD, moves elsewhere suggest that sterling is running out of fuel already against many other currencies.


Sterling was not the only currency to hit its highest value of the year in the dying embers of 2020. The European single currency that spent a lot of the 2nd half of last year gaining against both GBP and the USD looks set to keep its foot on the accelerator.

Gains in the euro – it rose close on 10% last year – will inevitably cause investors to speculate about whether the European Central Bank will seek to quell a move that inherently damages the prospects of higher inflation. Wednesday saw ECB policymaker Olli Rehn remind the market that that the bank was “monitoring exchange rate developments very closely”.

With the yuan continuing to strengthen however, we think the ECB will be happy with the current euro move until around $1.25.

US dollar

With vaccines rolling out, a shot of US stimulus and a wider belief that the consensus call on a return to some semblance of economic and social normality by the latter half of the year, the dollar is fixed in a lot of people’s crosshairs.

A weak dollar makes poor currencies look strong (here’s looking at you GBP) and while we believe that this dollar sell-off has a way to go, there are a number of factors that will determine the magnitude of such a move.

The final throes of last year’s election take place in Georgia in the coming days with two Senate seats up for grabs; a win for both Democratic candidates would put the Democrats in charge of the Senate and make some of the Biden spending plans a lot easier to pass. Results are due on Wednesday with the dollar viewing it as its first major test of the year.


Japanese manufacturing data led the way this morning with the highest growth in 20 months and an improving job picture. If we get similar numbers from around the world today, the risk-on atmosphere will continue.

Have a great day and welcome back.