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Currency Market Analysis

Dec 21, 2020 | Currency Market Analysis

Global Themes

Please note that the Daily Market Update will not be published from December 24, 2020 to January 3, 2021, we will be back on January 4, 2021.

New virus strain puts the Pound and Britain under pressure

This morning market sentiment has soured and safe haven assets rise as a new strain of coronavirus discovered in the UK has triggered flight bans and heightened concerns. Several countries cancelled flights to Britain and the port of Dover has halted traffic to France, which could lead to serious supply-chain issues ahead of Christmas. Prime Minister Boris Johnson convenes the Cobra cabinet today. GBP/USD is down by more than 1%, punished also by stalled Brexit talks. The EU and the UK continued trying to negotiate a trade deal over the weekend but little headway was made.

The new strain of COVID-19 is 70% more transmissible, raises the reproduction rate by between 0.4 and 0.7, and is "out of control" according to UK Health Secretary Matt Hancock as Britain announced a new restriction level, Tier 4, on London and the surroundings.

  • In the latest reports regarding Brexit negotiations, significant differences remain, especially on fisheries. A potential EU concession on the sensitive topic has angered the sector. Brexit deliberations missed a Sunday deadline set by the European parliament.

USD

The US Dollar index, rallied this morning as global investors digest new tightening COVID-19 lockdown measures introduced over the weekend. Risk off sentiment has seen safe haven assets increase in demand, with the likes of the Swiss Franc, Japanese Yen and Gold starting this week on the front foot. 

The index, a gauge of the US Dollar’s strength against a basket of 6 currencies, is up close to 1% this morning. Since the market participants adopted a more risk on sentiment the index became the asset to sell. The recent bounce in the index is being pegged as a matter of short positions being unwound given the weekend news. However a Reuters poll conducted with economists from a variety of banks still see that the overall sentiment heading into 2021 will be a risk positive stance driven by vaccines and stimulus. Coupled with that, US congressional leaders on Sunday agreed on a $900 billion package to provide new aid to the economy and individuals will be funded by a lot of borrowing in the US, which could lead to further dollar weakness for 2021.

  • EUR/USD is down over 0.8% just below the $1.22 handle this morning after rejecting the $1.2273 level the pair hit last week. Investors could profit take on longs this week given the recent news which could see the pair fall back towards the $1.20 which could offer some support for the pair heading into 2021.


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