Happy new year!
2020 was a volatile year in the markets and with Brexit and Trump now (almost) out of the door, will 2021 be calmer?
Brexit deal done but Covid crisis undermines Pound:
The Pound ended the year on relatively firm footing after the successful passage of a Brexit deal through Parliament. However, the rise in Sterling following the announcement of a deal was not as dramatic as some market participants had expected. This is likely down to a ‘buy the rumour, sell the fact’ move, as a deal was generally expected.
In addition, the Coronavirus pandemic looks set to continue being a key driver of Sterling over the next few months. New record levels of Covid-19 cases in the UK and the resulting restrictions have been putting a dampener on Sterling, which further explains the lacklustre response following the Brexit deal.
The UK economy has been plagued by years of uncertainty over Brexit and there's now hope that major inward investment plans for the UK will come to life after previously being put on hold. Sterling derives a lot of its value from inward investment flows, so this could see a boost of the Pound if the floodgates open. It now looks likely that traders will move on from the spontaneous Brexit reactions caused from comments by UK/EU officials. Instead, they will try and ascertain the longer-term impacts of Brexit by tracking the economic performance of the UK after leaving the EU and once we emerge from the Covid crisis.
Pound traders will be closely watching the Bank of England’s response to the rising Covid-19 infections and the impact this is having on the UK's economic outlook. Although they’ve generally shied away from talk of negative interest rates, the market is now expecting the BoE to set negative rates by May 2021. Sterling is likely to move depending on comments from BoE officials and how long the new tighter Covid restrictions last in the UK. Furthermore, how quickly the UK Government can roll out the new vaccines which are being heavily relied upon for a return to normality. A faster UK roll-out versus our international peers would give Sterling an advantage.
Trump on way out but Dollar remains on backfoot:
The US Dollar has started the year how it ended 2020: remaining firmly on the backfoot. Expectations the Federal Reserve will keep interest rates lower for longer, the increasing likelihood of further US Covid relief funding and broader improving global market risk sentiment has turned traders away from the ‘safe haven’ Dollar. However, we are far from out of the woods with this pandemic and therefore risk sentiment can quickly change.
With Trump exiting the White House this month and Biden taking charge, the markets are closely watching the results of tomorrow’s runoff Senate elections in Georgia to see if the Democrats can gain control of the Senate. Without victory, Biden would find it a challenge to pass major reforms. However, a victory here would likely lead to increased Dollar weakness as stimulus would be even more generous.
As a result, the GBP/USD hit fresh highs from May 2018 this morning. The GBP/EUR is down around 1-cent from New Year’s Eve but trades toward the higher end of where it’s been over the past 4-weeks. The EUR/USD continues to trade higher having hit fresh highs from April 2018, with the market touching 1.23.
Hopefully by the end of 2021, the world will return to normal after the pandemic and the impact the virus has on currencies will disappear. For now though, and particularly the next few months, the virus is likely to take centre-stage, which means volatility levels should remain high. As we move through the year and the restrictions (hopefully) subside, the economic data coming out of the different nations will come further to the fore as analysts begin to more accurately calculate the true impact.