Financial markets repeated a familiar pattern first seen on the 11th November when other trials from pharmaceutical companies Pfizer and Moderna showed progress.

In a return of investor confidence, the US dollar shed ‘safe haven’ positions. USD closed at its lowest point against the pound since the start of September, almost breaking 1.34, which would be the highest for the pound against the dollar since December 2019. The resultant rise in the value of the pound lifted sterling up against its other peers trading within 0.2 of a cent against the five-month high reached against the euro 12 days ago of 1.1285.

As well as the near fresh highs against the euro and US dollar, the pound against the Canadian dollar yesterday neared a three-month high. The reaction against the New Zealand dollar and the Australian dollar was much more muted since these currencies have been big beneficiaries of the return to confidence in financial markets, acting as big barometers of global trade and confidence.

In a sign of some ‘normality’ creeping back into financial markets, the ‘OFR Financial Stress Index’, composed by the Office Financial Research in the United States, reported global financial conditions of stress had eased back to levels before the coronavirus triggered widespread uncertainty in March.

Brexit Irish border

Brexit Deal in Sight?

On the topic of Brexit, there is some optimism with The Times reporting today that a Brexit deal might now be ‘in sight’ early next week. Talks are expected to continue this weekend between EU chief negotiator Michel Barnier and David Frost, his British counterpart.

Fishing remains the big issue with arguments over the type of access EU members will have to British waters, and how any dispute might be settled. The Times reports that whilst the deadlines are looming fast, government machines on both sides of the Channel are gearing up for a fast-track method to ensure any agreements can quickly be ratified in time to meet the legal 31st December deadline.

And as the saying goes, “good things come in three’s”, and on the economic data front too there was some positive news yesterday with the latest PMI (Purchasing Managers Index) survey for the UK in Manufacturing and also Services reflecting a higher than expected rebound so far this month.

This flash data for Manufacturing activity surprisingly rebounded firmly back into positive territory at 55.2 (on a scale where anything above 50 represents expansion and growth) whilst Services (which is reported to account for about 80% of the UK economy) was recorded at 45.8 versus the 42.5 predicted.

For How Long Will This Confidence Last?

The pound has displayed a recurring habit of rising lately, only to suddenly lose momentum and eradicate some of the gains. There is without doubt a gentle positive incline in general against both the euro and US dollar in recent weeks but with the optimism at times being built on possibly fragile ground, the potential for a move back lower exists.

For the rest of the week, the Spending Review by Rishi Sunak tomorrow will surely be of interest as we await to learn to what extent Rishi Sunak will be keeping support in place for a clearly troubled economy, whilst also retaining investor confidence that the leaves falling from his ‘magic money tree’ are ending up in the right places.

A potential backlash over a Public sector pay freeze could be just one of the potential pitfalls ahead as the man with a higher popularity rating than Boris Johnson continues to steer the British finances through the pandemic and its effects.

The government yesterday afternoon outlined further plans on what will happen when the current lockdown comes into force with a return to the ‘tiered’ system being put in place, with more information to follow on Thursday.

Boris could also face some challenges from his MP’s with Steve Baker’s ‘Coronavirus Research Group’ still skeptical of how seriously the PM was taking the effects on the economy and individuals. Speaking with Radio 4, Steve Baker declared the continued infringement on the right to a family life was a voilation of the European Convention of Human Rights. With Baker being a prominent Brexiteer and previous critic of the ECHR, the irony was not lost by some commentators.

Boris has now proved quite effective at tackling or avoiding confrontation and it might be that the positive effects from the vaccine news are his ultimate life raft to allow his party and the rest of the country to begin to focus on a more settled 2021.

Political uncertainty in government and worries over negative interest rates if the UK economy really takes a big nosedive in 2021, plus the uncertainty of a no-deal Brexit are all factors that could disrupt this recent rise for the pound and prove a challenge for sterling to overcome in 2021.

Economic Factors That Could Impact GBP Rates

When Will a Brexit Deal Be Agreed and How Will the Pound React?

Brexit is clearly one of the biggest topics ahead as investors nervously await some true signals of what happen next. As discussed earlier in the report, next week might finally be the moment many of us have been waiting for in terms of receiving news of a deal.

This news could be the defining moment for sterling as we finish 2020 and there remain the 3 topics of fishing, a free trade agreement and security remaining outstanding.

In terms of rates movements, Goldman Sachs has a forecast for 0.87 on EURGBP which is 1.15 on GBPEUR, with Danksebank echoing a similar viewpoint predicting 0.86 or 1.16 on agreement of a deal.

Danskebank don’t quite see parity on a no-deal Brexit whilst Goldman Sachs have highlighted this probability on numerous occasions in recent months should we see a ‘disorderly no-deal Brexit’.

The general flavour of all predictions has seemed to follow that a deal is positive for the pound whilst further signs of no-deal is negative, however an analyst at HSBC has gone against the grain following a note by Credit Agricole earlier in the year that even with a deal the pound could still be in trouble going into 2021 as there are many other topics on the economy and politics to tackle, and that any adjustment to a new trading regime with the EU might be disruptive.

All in all the next few days and weeks could prove pivotal for the pound against its counterparts. If you have an upcoming currency transfer and you wish to be alerted to important movements or to discuss a strategy, please get in touch to discuss further with our expert team.

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