US dollar continues to weaken as trade-deal saga ends for the UK pound – Bibby's FX update

Mon 4 Jan 2021
Posted by: William Barns-Graham
Features

bibby currency update

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Despite the significant moment of the UK finally completing its split from the EU on New Year’s Eve, it’s been a quiet week for global currencies and stock markets.

Investors had already priced in the fact that the UK was leaving the EU customs union and single market.

Pound remains firm 

Sterling benefitted from the approval of the Oxford/Astra Zeneca vaccine for Covid-19 to maintain its recent gains in value.

It dipped slightly on New Year’s Eve to a value of US$1.345 and €1.10 but has risen to $1.37 and €1.193 since.

US dollar slide continues 

The US market continues to be oriented around risk, particularly as cases of the illness rise and division remains over the country’s economic support package.

The currency is also struggling as its safe-haven status diminishes due to improving global risk sentiment. Global markets have continued to bounce on the news of Covid-19 vaccines and the resolution to the UK’s trade negotiations with the EU.

The US Dollar Index (DXY) slid from a high of 90.35 to as low as 89.52 last week, opening this week back around the 90 level.

Euro stays strong

Conversely, the euro continues to strengthen on the back of improved risk sentiment and the apparent ambivalence of the European Central Bank (ECB) in reaction to this.

The single currency hit its highest value since April 2018 at $1.231.

Global markets are steady

The vaccine situation is enabling central banks around the world to press ahead with quantitative easing (QE) programmes and governments with stimulus packages.

Barring a major surprise on the level of the Covid-19 outbreak last year, we expect policymakers to continue with these investment programmes which will in turn bolster stock markets but undermine the US dollar.

Oil within distance of $50 per barrel

Oil similarly benefits from a confident economic environment and reached new highs since the start of the pandemic, getting back to within touching distance of US$50 per barrel at $49.8.

Gold and silver rally

Gold and silver have both rallied over the New Year period, with gold up to above $1,930 and silver faring even better at around $27.3 this morning.

Bitcoin surge continues

Gains for precious metals pale into insignificance when compared to those of Bitcoin and other cryptocurrencies.

After trading around $26,000 at its lowest point last week, Bitcoin has again surged to within touching distance of $35,000.

The cryptocurrency has become the destination of choice for both short- and long-term investors.

The year ahead

The New Year begins with the vaccine-related optimism that 2020 finished with, though rising Covid cases around the world continue to occasionally undermine this.

It is hoped that financial markets will ultimately flourish in the months ahead as QE and fiscal packages continue to be introduced to counteract the economic impact of the pandemic.

Certainty for the pound

For Sterling, the saga of whether the UK will secure a trade deal with the EU or not is over, bringing far greater certainty to UK businesses and investors.

While we may see images of lorry queues at ports in the coming weeks, the certainty afforded to UK businesses should allow the pound to gradually edge back towards better levels, with the initial target being the benchmark of $US1.40.

Euro also to benefit

Against the euro the pound’s resurgence may be less pronounced as the deal helps both sides.

We do, however, expect some push back from the ECB against the euro becoming too strong, which could help Sterling back towards the €1.15 level and possibly higher.

Events can change things

However, nothing occur in a vacuum and real-world events make predicting currency movements a lottery – as the last year has shown us.

The Bank of England (BOE) is still publicly ruminating on the possibility of introducing negative UK interest rates which would definitely hamper Sterling’s resurgence.

Covid-19 remains the major factor for predictions in the foreseeable future, with the possibility of tougher containment measures potentially undermining recovery hopes in the next couple of months before the anticipated vaccine relief takes hold.

Economic data this week

Highlights this week include:

Today (4 January)

  • Global manufacturing PMIs
  • Eurozone Sentix investor confidence survey
  • US construction spending data
  • Speeches:
    • The Federal Open Market Committee (FOMC)’s Bostic

Tuesday      

  • German retail sales and unemployment data
  • US ISM manufacturing PMI and API weekly crude oil stocks data

Wednesday   

  • Global services data and composite PMIs
  • US ADP nonfarm employment change. Factory orders and Crude oil inventories data
  • Minutes from the last FOMC US interest rate setting meeting
  • Speech:
    • BOE Governor Bailey

Thursday    

  • Global construction PMIs
  • Eurozone inflation report and retail sales data
  • ECB Monetary Policy statement
  • US weekly initial and continuing jobless claims data
  • Speech:
    • FED’s Evans

 Friday     

  • German industrial production data and trade balance
  • Eurozone unemployment rate and business confidence surveys
  • US employment report