Pound crushed as UK is shut off from Europe due to new Covid strain – Bibby's FX update

Mon 21 Dec 2020
Posted by: William Barns-Graham
Features

bibby currency update

Although the ongoing distribution of the vaccine continues to provide some light at the end of the tunnel, markets continue to be disrupted by the Covid-19 pandemic and the protracted trade negotiations between the UK and EU.

The pound had been experiencing a steady rise in value due to optimism in the UK-EU trade talks, but another missed deadline and the announcement of toughened Christmas lockdown restrictions over the weekend has hit hard.

Good week for the pound till Friday…

Sterling had been rising against the euro and US dollar last week on expectations that a deal could be reached by the weekend.

It rose from US$1.33 and the mid-1.09s against the euro to as high as $1.3620 and €1.1130.

... before bleak weekend announcements

UK-EU trade talks remained deadlocked over fisheries, meaning a deal was not secured at the weekend, however, worse news came on Saturday when the PM announced fresh lockdown measures in the UK over Christmas.

After scientists confirmed the existence of a new, more easily spread strain of the virus, the government introduced new Tier 4 restrictions for London, the east and south east of England.

Many European countries have since closed their borders to travel from the UK, with France shutting off freight movements.

As a result, the pound has dropped to US$1.3260 and €1.0880 at the time of writing.

Equities boosted by vaccine hopes and US stimulus

In more positive news, the ongoing distribution of the Covid-19 vaccine has helped boost global equities.

Encouraging signs that the US will finally pass a fiscal relief package to support businesses and individuals are also helping markets.

The package will not only support the US economy, but it should help to prevent a government shutdown with time also running out for the US to agree its 2021 budget.

Dollar continues to struggle

Positive market news has weighed the US dollar down, as the currency usually performs strongly when markets struggle due to its safe-haven status.

The US dollar index (DXY) slid from a high last week of 90.90 to as low as 89.73 before closing the week back around the 90 level. Its bounce back above 90 was in part due to the slide in value for the pound.

European Central Bank unconcerned by strong Euro

The European Central Bank (ECB) continues to show little concern over the strengthening value of the euro.

The single currency reached its highest levels against the US dollar since April 2018 at US$1.227. This receded this morning, partly due to a slight recovery for the pound. It opened this week below the $1.22 point.

Gold and silver 

Gold and silver both profited from the weakening US dollar, with gold jumping almost US$100 in value to around $1820 per ounce, and silver from rising from around $23.60 to as high as $27.40.

Bitcoin surge

The stand-out performer last week was Bitcoin once again, which has surged in recent weeks to a record value of US$24,260.

Money continues to pour into the crypto space as a hedge against currency devaluation, taking over from precious metals as the current favoured backup for wealth investment.

Week ahead

A bad few days for the pound could get even worse unless the UK and the EU secure a trade agreement in the week ahead.

Reports that fisheries were the only remaining obstacle to an agreement were largely responsible for Sterling’s good performance for much of last week, but the longer it goes before a deal is finalised, the larger the spectre of a no-deal will once again become.

Economic Data 

Highlights this week include:

Today (21 December)

  • UK CBI Trade survey
  • EU Consumer Confidence

Tuesday      

  • UK Q3 GDP and public sector finances data
  • German consumer sentiment figures
  • US Q3 GDP data

Wednesday   

  • US weekly jobless numbers, as well as personal income and spending data Thursday    
  • Start of the festive holiday period in many countries
  • US durable goods orders data

Friday     

  • Christmas Day