Pound extends gains on Brexit deal hopes

The pound extended its recent gains on Brexit optimism yesterday, although the mood soured last night following pessimistic comments from Boris Johnson and EU Commission President Ursula von der Leyen.
 
This Brexit caution has caused Sterling to fall back this morning, with GBP/EUR slipping to €1.1038 and GBP/USD retreating to $1.3530. GBP/CAD and GBP/AUD are also weakening slightly at C$1.7248 and AU$1.7799, respectively. Meanwhile, GBP/NZD is flat at NZ$1.899.
 
Looking ahead, with limited time to reach an agreement in Brexit and US stimulus talks, any headlines on progress in both will likely drive market volatility.
 

What’s been happening?

The pound continued to soar yesterday on optimism the UK and EU will reach an agreement after EU chief Brexit negotiator Michel Barnier commented ‘good progress’ is being made in trade talks.
 
However, the Pound fell back from the day’s highs overnight following EU Commission President Ursula von der Leyen commenting that ‘big differences remain’, and Boris Johnson saying trade talks are in ‘serious situation’ and no deal is ‘very likely’ unless the EU ‘substantially’ changes stance.
 
Sterling was unaffected as the Bank of England (BoE) announced interest rates and monetary policy will remain unchanged, as expected, but warned growth in the first quarter of 2021 will be weaker than previously forecast.
 
The significant US dollar selloff continued on Thursday as risk-on trade weighed on safe-haven USD demand.
 
As US Congress nears a deal on a $900billion stimulus package, market risk appetite is increasing and in turn is driving the US dollar lower.
 
USD exchange rates came under further pressure on the back of an unexpected jump in the latest jobless claims rising to a three-month high to 885,000, highlighting concerns over the US economy’s recovery.
 
Meanwhile, the euro strengthened due to its negative correlation with the weakening US dollar.
 
These gains came despite the confirmation that the Eurozone remained in a state of deflation in November.
 
With inflation coming in at -0.3%, concerns linger over the Eurozone economy’s recovery, especially as many European countries remain under coronavirus restrictions going into the new year.
 

What’s coming up?

Following last night’s phone call between Boris Johnson and EU Commission President Ursula von der Leyen, the Pound could experience increased volatility today and remains highly sensitive to headlines of potential Brexit trade deal.
 
The release of UK retail sales figures this morning could offer GBP exchange rates limited support as sales fell less than expected at -3.8% in November during the national lockdown.
 
The US dollar is attempting to recover slightly this morning, making some gains after being oversold on Thursday.
 
However, the ‘Greenback’ will likely come under pressure again while risk-on trade prevails, with the upbeat mood driven by US Congress going over the details for a fiscal stimulus deal.
 
While the US dollar remains weak, EUR exchange rates will likely retain support.
 
However, any gains could be limited as forecasts point to the Ifo German business sentiment surveys indicating another monthly decline in confidence in the Eurozone’s largest economy, adding to the likelihood of a fourth quarter slowdown.