The pound to dollar rate ended last week by plunging into 1.31 territory for the first time since mid-November, before settling back above the 1.32 level. A jaded pound was winded by comments from Prime Minister Boris Johnson, who said a no-deal Brexit looked “very, very likely”. Having taken a tumble in the wake of the gloomy outlook, the pound’s fall was broken slightly when the German and Irish foreign ministers said an agreement between the UK and the EU was still on the cards.
Fears of a no-deal scenario intensified over the weekend when Mr Johnson suggested the UK and EU are “still very far apart” on key issues and the UK must prepare to trade on WTO terms. The pound was thrown a lifeline, however, when the PM and European Commission President Ursula von der Leyen agreed to extend the cut-off point for talks beyond Sunday’s deadline: in a joint statement, the two leaders said it was “responsible at this point to go the extra mile”.
Renewed hopes of a deal meant the pound vs dollar rate jumped back above 1.33 this morning – although market analysts warned the recovery could be short-lived as investors closely monitor developments in the nail-biting negotiations.
In its latest financial stability report, published on Friday, the Bank of England warned that “volatility and disruption” looms if the Brexit transition period ends without an agreement on financial services – adding that it may have to take action to keep markets operating smoothly.
Safe Haven Dollar Rises as Risk Appetite Falls
Dollar safe haven strength compounded the pound’s Brexit concerns on Friday after traders flocked to it for shelter as risk appetite fell. And it wasn’t only growing concerns that Britain will exit the EU without a deal that was responsible for the risk-off mood; the prospect of delayed US fiscal stimulus amid a surge in COVID-19 cases was also to blame. Despite US officials preparing for the most ambitious vaccination campaign in decades, talks on a federal COVID-19 relief package have not yet been fruitful.
With the Brexit transition deadline almost upon us and talks still stalling, both sides need to find a way of getting in gear and agreeing a route to a historic deal – and they need to do it soon. For the pound, this represents the difference between either motoring higher against the dollar or breaking down in the coming days.
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