The festive season is typically a quiet period for markets. This year had potential to be an exception to the rule after the UK and EU finally struck a post-Brexit free trade deal on Christmas Eve. Instead of rocketing to multi-month highs, however, the pound to dollar rate shrugged its shoulders at the news following an initial rally – and the reason for its unenthusiastic response and subsequent slide lower was simple: the contents of the deal is not considered a game-changer for the pound.
After months of haggling between London and Brussels, investors appear unsettled by what some believe to be a “thin” post-Brexit free trade agreement – despite reassurances from both Boris Johnson and European Commission President, Ursula Von Der Leyen about the strength of the deal for both sides. One major concern is the future of the services sector, which accounts for 80% of the UK economy and was largely absent in the deal. The government must, therefore, return to the negotiating table to secure access to the EU for services companies.
The pound vs dollar rate spent much of yesterday snaking its way between the 1.34 and 1.35 benchmarks – as has largely been the case since the deal was announced last week. By this morning, the pair had managed to settle firmly in 1.35 territory.
Dollar Weighed Down by US Stimulus Optimism
The dollar continued to slide on US stimulus optimism yesterday after the House of Representatives agreed to more than triple stimulus payments to Americans, before sending the proposal to the Senate for a further vote. The positive news was considered less upbeat for the safe-haven dollar, which suffered at the hands of a lift in market spirits and a subsequent boost in risk-taking. Investor optimism may be a little premature, however, as the legislation is not expected to pass through the Senate due to attempts by Republicans to rein in spending.
The government bill – which places the post-Brexit trade deal into law – is expected to pass through Parliament today when MPs and peers are recalled from their Christmas break to vote on it. Despite attracting criticism from some quarters, the general consensus is that it’s better than no deal at all – especially against the backdrop of the worsening pandemic in the UK.
Two economic data releases of note hit the headlines in the US today: the Chicago Purchasing Managers’ Index for December and Pending Home Sales.