Pound Sterling

Weekly Update: Pound Soars before Brexit Hopes Dented

The Pound hit a 31-month high against the US Dollar this week, driven by optimism for a Brexit trade deal and a risk-on mood, before retreating at the end of the week.

Meanwhile, the US dollar extended its losses, plummeting to a two-and-a-half year low as upbeat trade eroded demand for safe-haven USD.

Pound Climbs on Brexit Deal Optimism

GBP/EUR – Up one cent on the week’s opening level

GBP/USD – Up three cents on the week’s opening level

The Pound climbed through the week on optimism a UK-EU Brexit trade deal is on course to reach agreement, with Sterling hitting a 31-month high against the US Dollar.

However, the Pound retreated as these hopes were dented at the end of the week following talks between UK Prime Minister Boris Johnson and EU Commission President Ursula von der Leyen, with Johnson commenting that trade talks are in a ‘serious situation’ and no deal is ‘very likely’.

With Brexit trade talks finely balanced and little time left, the Pound’s movement will be driven by any positive or negative reports emerging from UK-EU negotiations, while any surprise in the UK’s third quarter GDP could stoke additional volatility.

Euro Underpinned by USD Weakness

EUR/GBP – Down one pence on the week’s opening level

EUR/USD – Up one cent on the week’s opening level

The Euro avoided losses through much of the week due to US Dollar weakness, which supported EUR exchange rates on the pairing’s negative correlation.

However the single currency came under pressure from a ‘hard’ lockdown in Germany and confirmation that the Eurozone remained in a state of inflation, reinforcing worries the bloc will face a double-dip recession this winter.

With Eurozone consumer confidence the only notable data release next week, EUR exchange rates will likely be driven by Brexit developments and any shifts in market sentiment.

US Dollar Hits Two-and-a-Half Year Low

USD/GBP – Down two pence on the week’s opening levels

USD/EUR – Down one cent on the week’s opening levels

The US Dollar selloff gathered momentum this week, crashing to two-and-a-half year lows amid risk-on market trade, which was buoyed by Covid-19 vaccine optimism and US stimulus nearing agreement in US Congress.

Adding pressure to USD exchange rates was the Federal Open Market Committee’s (FOMC) December policy announcement, which indicated it would leave monetary policy as loose as possible. Meanwhile, the jump in initial jobless claims figures also weighed on the US Dollar.

USD exchange rates will remain sensitive to shifting market sentiment next week, and whether Congress are able to pass new fiscal stimulus. The third quarter GDP reading could drive movement if the final figure is revised, while a predicted slowing in durable goods orders could weaken the US Dollar.

Australian Dollar Benefits from Risk-On Trade

AUD/GBP – Unchanged on the week’s opening level

AUD/USD – Up a cent on the week’s opening level

The Australian Dollar experienced significant volatility this week, fluctuating on shifting market risk appetite, with AUD/USD hit its highest level since March 2018.

The Reserve Bank of Australia’s (RBA) December meeting minutes put modest pressure on the ‘Aussie’ as policymakers indicated they could expand monetary easing and will keep interest rates low for three years.

Retail sales data released next week could apply pressure to AUD exchange rates as forecasts suggest a -0.6% drop in spending, while risk appetite driven by US stimulus, vaccines, and Brexit will influence the ‘Aussie’.

Key Data

Dec 21 EUR Consumer Confidence Flash (Dec)

Dec 22 AUD Retail Sales Prel (Nov)

Dec 22 GBP GDP Growth Rate Final (Q3)

Dec 22 USD GDP Growth Rate Final (Q3)

Dec 23 USD PCE Price Index (Nov)

Dec 24 USD Durable Goods Orders (Nov)

Dec 24 USD Initial Jobless Claims (19/Dec)