Pound Snaps 3-Session Slide on Brexit Deal Optimism

What’s happening: The British pound traded higher amid optimism that the European Union and the UK would reach a post-Brexit trade deal before Christmas.

What happened: Investor sentiment was lifted by reports of the negotiators reaching an outline of a deal, although this was not officially confirmed.

Markets remained elevated despite some speculations of the issue of battery imports for electric cars still stalling progress in talks.

Why it matters: The latest developments come as the British economy is again going through a rough patch, with the closing of businesses amid the spread of a new strain of the covid-19 virus.

Several countries closed their borders to Britain after the new virus variant was found to be 70% more transmissible than the original one. However, some European nations are expected to resume border activity to allow citizens to return to their countries. Investors took some solace from France’s decision to reopen its border for freight traffic.

Speculations earlier in the day of the Brexit trade deal having already been inked were thwarted by sources from the EU’s Executive Commission and the British government confirming that talks were still ongoing.

News of the outline of the trade deal being agreed on overshadowed concerns over US President Donald Trump asking for changes in the covid-19 relief package, which is expected to result in a delay in the stimulus being executed.

The pressure on the US dollar also supported the GBP/USD. The US dollar index, which measures the greenback’s performance versus a basket of six major currencies, has lost more than 6% this year. Prospects of further pressure on the US dollar continued to provide support to the currencies of emerging markets.

Investors shrugged off news of the UK government planning to put more regions under a Tier 4 lockdown to control the further spread of the new strain of the virus ahead of the new year.

The British pound added 0.2% to reach $1.3525 during the Asian session this morning, following a 0.9% gain yesterday, ending a three-session losing streak.

What to watch: Investors look forward to the EU and UK negotiators resolving their key differences and reaching a Brexit trade deal before the end of the transition period on December 31.

Markets will also focus on updates related to the spread of the new strain of the coronavirus and further restrictions in the country. No economic data is due for release today ahead of the Christmas holiday.

US stocks will be in focus today, the last trading day of the week before the Christmas holiday.

Context: Wall Street recorded modest gains on Wednesday, with markets monitoring the rollout of the covid-19 vaccine and President Donald Trump’s criticisms of the stimulus bill cleared by Congress.

Details: Trump vetoed the defence bill passed by Congress on Wednesday after criticising the $900 billion covid-19 relief package. The President advocated for direct payment cheques of $2,000 per person, much higher than the current proposal of $600.

Investors were concerned about a possible delay in the stimulus package from being implemented, while the US continued to record a massive surge in covid-19 cases and deaths. Meanwhile, Pfizer disclosed that the US government had paid for an additional 100 million doses of its covid-19 vaccine.

Trading volume remained low on Wednesday due to the short Christmas week, despite the country releasing various economic reports and developments on the covid-19 relief bill front.

The US released mixed economic data on Wednesday, with initial jobless claims declining to 803,000 in the recent week, while personal incomes and consumer sending dropped 1.1% and 0.4%, respectively, in November. Consumer sentiment also declined, while durable goods orders rose for a seventh consecutive month.

The Dow Jones index added 114.32 points to close at 30,129.83 on Wednesday, while the S&P 500 index snapped a three-day slide, settling higher by 0.1% at 3,690.01. The Nasdaq 100 bucked the trend and fell by 0.3% to close at 12,771.11 on Wednesday, after notching 54 record closes for the year.

What to watch: Traders will keep an eye on the developments related to the stimulus bill cleared by Congress on Monday.

The rising covid-19 cases will remain a major concern, with the US recording around 3,239 deaths on Tuesday, the third-highest single-day number ever.

Other Markets: European trading indices closed higher on Wednesday, with the FTSE 100, German DAX 30 index and French 40 up by 0.66%, 1.26% and 1.11%, respectively.

Turkey’s foreign exchange reserves and Central Bank of Turkey’s interest rate decision, Mexico's balance of trade and unemployment rate as well as Canada’s value of building permits.