Daily Currency Update

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Sterling benefits on further Brexit led sentiment.

GBP - British Pound

The pound reached two year highs against the US Dollar overnight amidst broader dollar weakness and suggestions that a potential breakthrough on Brexit negotiations could come this weekend. Gains against the Euro were more modest, confirming that the foreign exchange market still remains guarded on the two sides failing to reach an agreement. Hopes for an end to Brexit negotiations before Friday were quashed late on Wednesday when the UK government announced the House of Commons would close for the Christmas period and MPs would only return should a Brexit deal be agreed with the EU.

The pound rose sharply after it was announced that Parliament would sit through Monday and Tuesday next week, with markets interpreting this as a sign a deal would soon be announced and MPs would be required to vote it through. However, with talks not progressing far enough, this has been taken off the table temporarily. Journalists with the inside scoop on the negotiations state that a great deal of energy has been expended on agreeing level playing field provisions (LPF), but with this sticking point more or less agreed the focus can turn to fisheries. "Britain and the EU are close to agreeing a Brexit deal but a battle over fishing access could derail the agreement in the coming days, the European Commission president has warned," reports The Times on Thursday. Both the UK and EU are stuck at their opening positions, which sees the EU offering up to 18% of the €650MN worth of shared stocks caught in UK waters whereas The UK is said to be seeking 80%.

UK Services and manufacturing PMI’s were both released yesterday. Worryingly, the services data came out weaker than expected, and the services sector being such a dominant part of our economy, this did not bode well for what’s to come in 2021. Today see’s the Bank of England’s latest meeting, with a change to monetary policy not expected. However, with the trend from central banks globally talking about stimulus, we suspect the Bank of England may discuss something similar in light of a no deal Brexit scenario.

Key Movers

The US Dollar continues to weaken across the board, buoyed by relatively positive comments from the Federal reserve on Wednesday. The central bank left interest rates unchanged, dialled up their expectations for growth and put some specific numbers around their QE programme. They decided against extending their asset purchase programme, which supports Chairman Powell’s view that the economy should perform strongly in the second half of 2021 thanks to the vaccine. The main takeaway is that while the Fed has been swayed by vaccine optimism, it will be a long time before they act on those views and start to unwind stimulus – hence the continuation of dollar weakness.

US consumer spending was released at -1.1% for November. Spending in October was revised lower as well, putting retail sales down slightly versus the small increase previously reported. Between rising jobless claims, surging virus cases and new restrictions that limited mobility last month, US shoppers are spending less. Americans spent 14% less on holiday purchases between Black Friday and Cyber Monday this year compared to last. Unfortunately less spending on holiday gifts is trend that is a likely to persist into December posing a big problem for fourth quarter growth. Widespread vaccine distribution is on its way but until that happens the possibility of more economic pain explains the Fed’s cautiousness today.

The Euro also rallied to 2.5 year highs versus the US Dollar. Eurozone data was unambiguously positive with manufacturing and services activity improving in the month of December. Between all recent reports, the evidence is now clear that recent lockdowns did not take a big a toll on the economy. Manufacturing in particular seems to be doing well but improvements have also been seen in services.

Expected Ranges

GBP/USD: 1.3530 - 1.3640 ▲

GBP/EUR: 1.1080 - 1.1125 ▲

EUR/USD: 1.2180 - 1.2240 ▲

GBP/AUD: 1.7705 - 1.7900 ▼