GBP/USD hits 31-month high on Brexit deal optimism

The pound soared on Wednesday as hopes that the UK and EU will be able to reach a trade agreement in the coming days underpinned the currency.
 
Sterling is extending this momentum today, with GBP/EUR ticking higher at €1.1093 and GBP/USD jumping to $1.3577. GBP/CAD is strengthening at C$1.7245, while GBP/AUD and GBP/NZD hold steady at AU$1.7809 and NZ$1.8985, respectively.
 
Looking ahead, some focus will shift from Brexit to the Bank of England (BoE) today as the bank delivers its final rate decision of the year.
 

What’s been happening?

The pound was catapulted higher through the first half of yesterday’s European trading session, with the GBP/USD exchange rate even striking a new 31-month in the process as Sterling sentiment was turbocharged by Brexit optimism.
 
This appeared to be driven by comments by European Commission President Ursula von der Leyen as she told the European parliament that ‘path to an agreement’ on a Brexit trade deal is visible.
 
However, the pound relinquished some of these gains later in the session after Downing Street warned that a no-deal Brexit remains the most likely outcome.
 
At the same time, the euro found modest gains on Wednesday after the latest Eurozone PMI figures printed above expectations, with activity in the bloc’s private sector only narrowly contracting in December.
 
The US dollar, meanwhile, fell further to two-and-a-half-year low after the Federal Reserve indicated it intends to continue its accommodative monetary policy until ‘substantial further progress has been made’.
 
The Fed’s announcement boosted risk appetite, which in turn weakened the US dollar. This risk-on mood was further fuelled by news that US Congress is closing in on a $900bn stimulus package ahead of Friday’s deadline.
 

What’s coming up?

In addition to Brexit, the spotlight for GBP investors today will also be on conclusion of the Bank of England’s (BoE) last policy meeting of 2020.
 
While the Monetary Policy Committee (MPC) isn’t expected to have made any policy changes following this month’s meeting, the BoE’s outlook for 2021 will be a key focus for traders.
 
In Europe, the publication of the Eurozone’s consumer price index could place the euro on the back foot this morning as November’s finalised release is set to confirm that inflation in the bloc remained at its lowest levels since 2016.
 
Meanwhile, the focus for USD investors today will be on the latest US initial jobless claims.
 
Last week’s release will be closely watched by markets as another substantial increase in unemployment claims will fuel further concern over the state of the US jobs market.