The pound took a beating on Monday morning amid Brexit and travel ban chaos. Another weekend passed and yet another deadline was missed in trade talks between the UK and EU. The deadlock in Brussels was compounded by the decision from a raft of European countries to close their borders to the UK, following the discovery of a new strain of the coronavirus. The pound to dollar rate subsequently fell off a cliff, plummeting by more than three cents to less than 1.32 – its worst day since March, when the coronavirus outbreak sent global markets into a spin.
By the evening, however, the pound had clawed back a large chunk of its losses as negotiators edged towards a compromise on the one issue that stands in the way of a post-Brexit trade deal: the Bloc’s fishing rights in British waters. Meanwhile, productive talks between Boris Johnson and French President Emmanuel Macron raised hopes that the flow of trade between the neighbours could be eased “in the next few hours”. The meeting took place after France closed its borders to UK hauliers for 48 hours due to the new coronavirus variant.
The pound has been sensitive to developments in the post-Brexit negotiations as the transition deadline (31st December) shadow looms overhead. Talk of deadlines has been cheap of late, with both parties missing their initial 13th December target and Sunday’s cut-off to reach a trade deal one way or another before the end of the year. Yesterday, the government ruled out extending the transition deadline into 2021, despite the continued deadlock and escalating COVID concerns.
The pound was given a further boost this morning when official data showed that the UK economy grew by a record 16% in the third quarter. While encouraging, the rise failed to make up the 18.8% slump in Gross Domestic Product (GDP) during the April-June period when much of the economy was frozen by draconian coronavirus restrictions.
Dollar Suffers Whiplash
Growing fears about a fast-spreading new coronavirus strain, and its impact on UK supply chains, prompted investors to flock to the safe-haven dollar yesterday morning – causing the pound to dollar rate to nosedive to a 10-day low. Pandemic pandemonium in Europe overshadowed the deal US Congress agreed on Sunday for a $900 billion coronavirus aid package.
However, the dollar recoiled following its initial surge as trader risk appetite recovered – wiping out all its gains. The reversal in fortunes was triggered by a triumvirate of factors: vaccine optimism, Brexit volatility and aid package momentum. The Federal Reserve Bank of Chicago’s National Activity Index declined from 1.01 in October to 0.7 in November – but the damage had already been done for the dollar.
The latest Gross Domestic Product figures are set for release from the US today.
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