December 24, 2020 at 09:04AM
The EU and UK are expected to announce a post-Brexit trade deal shortly leaving Sterling free to move higher against a range of currencies.
The latest UK Covid-19 infection and fatality rates may weigh on Sterling in the near-term with both jumping sharply higher yesterday. While Brexit may well be finalized today, large swathes of the UK are in near-total lockdown and are expected to stay that way over the coming weeks. Six million more people will enter tier four on December 26, taking the total to 24 million while an additional 24.8 million people will remain in tier three.
GBP/USD is changing hands around 1.3575, a fraction below yesterday afternoon’s high, and may look to press back towards a cluster of levels seen back in March-April 2018 with a longer-term target around 1.4375. The move higher should be reasonably well supported and it may now be the time to look at sell-offs as potential buying opportunities for the medium- to longer-term.
GBP/USD DAILY PRICE CHART (MAY – DECEMBER 24, 2020)
The latest IG client sentiment data show that traders increased their Sterling long exposure sharply over the last seven days. Retail trader data shows 53.59% of traders are net-long with the ratio of traders long to short at 1.15 to 1.The number of traders net-long is 33.97% higher than yesterday and 71.16% higher from last week, while the number of traders net-short is 11.56% higher than yesterday and 17.13% lower from last week. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bearish contrarian trading bias
UK markets opened higher on Thursday morning ahead of an expected Brexit trade deal.
The blue-chip FTSE 100 climbed by 28 points to 6,524, a rise of 0.43%, soon after markets opened.
Across Europe, shares were also on the rise, although the key Frankfurt stock market was closed
Asian markets and the pound moved higher on Thursday ahead of a possible post-Brexit deal.
Japan’s Nikkei gained in early trade while markets in Australia, South Korea and Singapore also saw modest rises.
The pound gained 0.2% against the US dollar, rising slightly above $1.35 in the Asian trading day as speculation grew that a deal was imminent.
Sterling has always been the most reliable of Brexit trade deal sentiment – the pound rose against the US dollar yesterday and continued that rise this morning.
It started the week worth $1.34, dropped to $1.32 as hopes of a deal faded, and this morning climbed to $1.36.
The stock market reaction today has been muted – the FTSE 100 was barely changed this morning, but much of the reaction to the looming deal took place yesterday.
The FTSE 250, a stock market index that is regarded as more representative of the UK economy, climbed nearly 2% on Wednesday.
Lloyds Bank, which investors have come to see as a bellwether of sentiment towards a trade deal, rose 7% yesterday and another 6% this morning.
An agreement on fishing rights has been the main stumbling block of the trade talks as an end-of-year deadline looms.
The pound has seen plenty of volatility in recent weeks as negotiations between UK and European ministers have stalled and deadlines missed. Last week, it had hit a two-year high above $1.36.
The British currency had surged almost 1% in the previous session to snap a three-day losing streak in what has been a roller-coaster ride.
“Sentiment improved after headlines started appearing that the United Kingdom and European Union have finally reached a provisional Brexit trade agreement.” said Jeffrey Halley at foreign exchange firm Oanda.
The pound was also boosted after France lifted its ban on freight coming from the UK, which it had enacted in response to a more contagious coronavirus variant.
The euro also strengthened 0.1% to $1.22025, adding to a 0.2% gain overnight.
The US dollar also saw some price movement as hopes for a UK-EU agreement would protect some $1tn (£740bn) in annual cross-channel trade from tariffs and quotas.
A deal would end the prospect of the UK and the EU imposing widespread import taxes on each other’s goods from 1 January, when the Brexit transition period ends.
But the pre-Christmas Brexit cheer didn’t extend to all Asian markets.
Chinese markets were mostly flat, as investors absorbed the news that Chinese regulators have announced a monopoly investigation into technology giant Alibaba.
Hong Kong’s Hang Seng index along with China’s Shenzhen and Shanghai stock markets were all relatively flat in trading.
The UK has been seeking trade deals with a number of Asian countries and has signed agreements with Japan, South Korea, Vietnam and Singapore.
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