FX markets have begun their first proper trading day secure in the knowledge that the United Kingdom will have a trade deal above WTO standards with respect to the EU-27 come 1st January. So far there hasn’t been a huge sigh of relief evident within the Pound but it is evident that, in combination with Trump signing a fiscal stimulus bill to prevent US government lockdown, markets are embracing less defensive conditions this morning. The Pound did rally upon confirmation of a deal on Thursday afternoon. However, upward momentum was capped and prices ultimately rejected it seems at 1.36/1.115 versus the Dollar and Euro respectively.
The lacklustre move in the Pound comes down to two things. Firstly, the prospect of a deal was largely priced in with the real risks to GBP pricing lurking towards the downside should a no-deal have materialised. Despite GBP being off of its Thursday highs, in comparison with where we might have been trading this morning should a no-deal have become apparent last week, GBP is solid. The second reason is that the deal itself is a hard form of Brexit and provides for tariff free (and limits thin non-tariff barriers to) trade only. The deal does not cover services, including financial services. The deal also makes no attempt to preserve elements of the customs Union and single market that are supportive of economic growth.
The market this morning is also taking note of astronomically high rates of coronavirus infection in the UK and reports that hospital admissions are higher than those in the first wave. With much of the UK already in the highest tier of infection, the expectation of a bumpy road ahead with respect to the health crisis and its knock on implications upon the economy have GBP on the back foot. The deal should still, however, provide a positive backdrop for Sterling for some time to come. The deal whilst not being what all may have hoped for does provide an immensely important legal backdrop and starting point upon which to shape UK trade with respect to the Union whilst respecting the result of the 2016 vote.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
US Trade War Tariffs With all markets awaiting what emanates from POTUS later today, Trump has certainly achieved one aim: getting the world’s collective attention. Increasingly desperate TV pundits have spent the past hours dragging past Trade Negotiators into the studio in an effort to get them to predict what the tariffs will look like. […]
De-Dollarization A shift away from the US Dollar with Central Bank Reserves denominated in US Dollars moving down from a high of just over 70% down to 60% in the past 20 years is note worthy but the speed of that decline makes it less striking. However there are 3 factors that are changing the […]
Pairs Trading Back in the days when I worked in Bermuda for a hedge fund, we were always seeking stocks that were overvalued and other stocks that were undervalued having analysed both sets of historical price behaviours. Normally those stocks were in the same industry but not necessarily in the same geographic region. In the […]