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Sterling higher as Brexit talks extended

GBP - British Pound

Sterling continued to feel under pressure through the end of last week, falling to a low of 1.3134 against the USD, as both the UK and EU stated a ‘No deal’ Brexit was looking more likely. As the self-imposed Sunday deadline approached, Boris Johnson appeared ready to embrace a no-deal Brexit and prepared Royal Navy gunboats to defend UK fishing waters. In the end, talks continued through Sunday with the European commission president Ursula von der Leyen and both parties have agreed that negotiators would go "the extra mile" in the next few days to reach a deal.

Reading out a joint statement on Sunday, Mrs von der Leyen said: "Despite the exhaustion after almost a year of negotiations, despite the fact that deadlines have been missed over and over, we think it is responsible at this point to go the extra mile."

Mr Johnson later said, "where there is life, there is hope", and that the UK "certainly won't be walking away from the talks".

The news started a rally in Sterling as soon as markets opened overnight and propelled GBP/USD to tip the 1.34 level before retreating slightly.

GBP/EUR also gained, pulling back from Friday's low of 1.0835 to hit a high (so far of the day) of 1.1037.

This weeks’ moves will again be Brexit dominated however, we are also expecting the release of UK manufacturing PMI, Bank of England interest rate announcement and monetary policy statement plus UK retail sales on Wednesday, Thursday, and Friday, respectively.

Key Movers

Dollar weakness is being seen across the board this morning as the global vaccine-driven economic recovery is lessening the need for the safe-haven USD amongst investors. An added hurdle for the dollar has been the lack of an agreement for a US stimulus package amongst democrats and Republicans. Congress had originally passed in March the CARES Act which provided relief to many businesses and qualifying citizens, but with this due to expire in a matter of weeks, markets are desperately awaiting news of a package to help drive the US post COVID economic recovery.

The EUR/USD moved sideways last week consolidating just above the 1.21 handle on Friday. We saw the pair travelling upwards to 1.2160 following the ECB stimulus increase however, on Friday a dovish speech by the ECB saying that they would be ‘vigilant’ on the exchange rate and will continue to monitor developments, noting that recent appreciation put downwards pressure on Eurozone price growth, saw the pair retreat.

The best performer against the USD was the Australian dollar last week, with AUD/USD breaking above the key psychological level of 0.75 cents. The main driver has been a surge in iron ore futures thanks to Chinese demand and a potential shortage in supply due to disruptions caused by storms hitting Western Australia. With the AUD moves being closely correlated to commodity prices, it is no surprise to see the pair rise to these levels.

As mentioned, currency moves will continue to be dominated by Brexit, COVID and US Stimulus package headlines, however, later this week we have the following data releases which could provide further volatility:

Wednesday: UK and European manufacturing and services PMI, US retail sales, manufacturing PMI and US Federal Open Markets Committee (FOMC) statement and New Zealand GDP
Thursday: Australian employment data, Swiss policy assessment and conference, UK Bank of England Interest rate and Monetary policy summary, US unemployment claims
Friday: Japan’s monetary policy statement, UK retail sales, German business climate

Expected Ranges

GBP/USD: 1.3350 - 1.3450 ▲

GBP/EUR: 1.0990 - 1.1090 ▲

GBP/AUD: 1.7665 - 1.78 ▲

GBP/NZD: 1.8775 - 1.8925 ▲

GBP/CAD: 1.7015 - 1.7165 ▲