18/12 – Dollar stronger ahead of last real trading session

Jeremy Thomson-Cook
Jeremy Thomson-Cook 18 December 2020

GBP: Last bit of Brexit uncertainty?

EUR: German viral cases jump

USD: Recovering on pre-break risk balancing

Sterling

Sterling has peeled away from the fresh highs it made yesterday as Brexit conversation once again faltered on the issue of fish and the government announced further lockdown measures, pushing over two-thirds of England into the most stringent precautions.

Yesterday’s Bank of England meeting underscores the uncertain optimism that many feel heading into 2021. Whilst the vaccine is likely to “reduce downside economic risks”, the continued spread of Covid-19 and further lockdowns on the horizon mean the UK may struggle to return to meaningful growth until the Spring.

With a Brexit deal seemingly days away the Bank of England chose not to mention negative interest rates in the accompanying policy statement despite much speculation – a sign that even with a bare bones trade agreement, that particular piece of weaponry can be stowed away for another crisis.

Be under no illusion however, following the Federal Reserve meeting the night before last, the Bank of England will not be raising interest rates anytime soon and we foresee the base rate holding at current levels into 2022.

With sights set on an agreement between the EU and UK over the weekend, we would be surprised if sterling didn’t rally into the close of today’s session should comments from Brussels and London remain supportive.

Euro

A slight rebound in the USD alongside the news that German Covid-19 infection jumped by record levels yesterday has taken the single currency lower this morning. Further divergence between the Eurozone and UK on infection rates – given harsher lockdowns on the continent than we are seeing here – may eventually leas to a lower GBPEUR but for now that pair remains dialled into Brexit negotiations.

US dollar

Continued negotiations and wrangling over a stimulus package have stopped the most recent leg of this dollar decline but this is not a guarantee that we will be seeing greater USD outperformance in 2021.

For now, it seems like investors and traders are happy to take some of the risk off the table through the festive period and hold dollars a little bit longer. From here on in liquidity in all markets will start to dissipate as market participants push away from their desks and take some time over the festive period.

Elsewhere

The rising dollar has knocked some of the frequent fliers -NZD, AUD, SEK, NOK – lower this morning and that should continue through the session.

Today’s is the last morning report of the year, although I’m sure there will be some ad hoc Brexit announcements between now and the end of the year given businesses have fewer than 7 business days to transition to a new way of working with the EU and those rules have yet to be released.

In the meantime, we hope that 2020 has been not too difficult for you and your family, and that 2021 offers you the opportunities and rest that the past 12 months couldn’t.