Thursday, December 17, 2020

British Pound Hits Multiyear High on Brexit Optimism

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News shaping
the markets today

     

What’s happening: The British pound climbed to its strongest level in over two years on Wednesday as markets remained optimistic about the UK and EU reaching a Brexit trade deal soon.

What happened: The sterling reached multiyear highs this week even as Brexit negotiations continue after repeated date extensions.

The surge follows the worst week since September for the GBP/USD forex pair, despite broad-based weakness in the US dollar.

Why it matters: The sterling has been highly volatile amid Brexit trade talks with the new deadline to reach a deal looming.

British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen had earlier given Sunday’s deadline to reach a deal. The extension of the deadline, raising hopes of a free trade deal being inked before the end of the Brexit transition period on December 31.

With just a few days remaining for the UK and EU to strike an agreement, optimism is high around both parties being close to striking a last-minute deal.

Comments from EU’s von der Leyen suggesting that the two sides had moved closer to striking a deal also supported the pound. The next few days are going to be decisive for unresolved issues including fair competition and fisheries.

Some economic data releases also supported market sentiment. The IHS Markit/CIPS manufacturing PMI improved to 57.3 in December, from a reading of 55.6 in November, while the services index rose to 49.9, from 47.6 in the prior month. Meanwhile, UK’s inflation rate eased to 0.3% in November, from the previous month’s 0.7%.

While the pound gained strength, the US dollar remained under pressure due to ongoing stimulus talks, with reports suggesting that policymakers had moving closer to announcing a $900 billion coronavirus-relief package. The greenback also declined on prospects of a vaccine-led recovery. Meanwhile, the Federal Reserve kept interest rates unchanged during its latest policy meeting with officials unanimously projecting no change in rates through 2021.

The sterling climbed as much as 0.7% to trade to $1.3549 versus the US dollar on Wednesday to record its highest exchange rate since May 2018. UK government bonds moved lower, with the 10-year gilts yield rising to its highest level in a week.

What to watch: Investors await the Bank of England’s interest rate decision today. The bank is expected to leave its benchmark rate unchanged at a record low of 0.1%.

Markets will also keep an eye on the ongoing Brexit talks, with expectations of a deal being announced soon. The sterling may witness some headwinds next year as UK settles into a new relationship with the EU.

The GBP/USD forex pair rose 0.2% to reach $1.3539 during the Asian session this morning.

The Markets Today

     

US stocks will be in focus today ahead of a basket of economic reports scheduled for release later in the day.

Context: Wall Street stocks closed mixed on Wednesday after the Federal Reserve announced plans to keep rates unchanged. Investors also monitored progress towards another stimulus package being announced by the US government.

Details: Federal Reserve Chairman Jerome Powell said the country’s central bank would use its complete arsenal of tools to help the economy recover from the covid-19 pandemic. Fed officials unanimously agreed to not changing interest rates till 2021, with many projecting a rise only in 2023.

Investors remained bullish about the prospects for another coronavirus relief package following the face-to-face meeting of lawmakers from both sides late Tuesday.

With rising covid-19 cases in the country, investors also monitored the rollout of the vaccine developed by Pfizer and BioNTech. Moderna’s vaccine is also expected to receive FDA approval this week.

On the economic data front, retail sales for November plummeted 1.1%, versus a 0.4% decline projected by analysts, with the resurgence of coronavirus cases resulted in restrictions in some regions. The IHS Markit services PMI declined to 55.3 in December, from a five-and-a-half-year high of 58.4 in the earlier month, while the manufacturing PMI came in at 56.5 in December, exceeding estimates of 55.7.

The Dow Jones index declined 0.2% to settle at 30,154.54 on Wednesday, after briefly trading higher earlier in the session. The Nasdaq 100 surged 0.5% to close at a record high of 12,658.19, while the S&P 500 added 0.2% to reach 3,701.17.

What to watch: Traders await economic reports from the US, including building permits, housing starts, initial jobless claims, Philadelphia Fed manufacturing index and Kansas City Fed's manufacturing production index. Initial jobless claims are likely to decline to 800,000 in the latest week, from 853,000 in the week ending December 5. The Philadelphia Fed manufacturing index is expected to decline to 20 in December, from a reading of 26.3 in November.

Markets will continue to keep an eye on covid-19 cases, with total infections in the US approaching 17 million.

Other Markets: European trading indices closed higher on Wednesday, with the FTSE 100, German DAX 30 and French 40 up by 0.88%, 1.52% and 0.31%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Eurozone’s new passenger car registrations and consumer prices, France’s manufacturing climate indicator and business climate indicator, Italy’s construction output, Turkey’s foreign exchange reserves, Canada’s ADP employment change, Argentina’s Consumer confidence as well as the US EIA’s natural gas stockpiles.