The pound spent much of yesterday extending multi-year highs against the dollar. Continued optimism about the chances of a post-Brexit trade deal, combined with hopes that a US deal could be easily achievable, gave it added momentum. According to the EU’s chief Brexit negotiator Michel Barnier, there had been “good progress” in negotiations on Thursday morning. Meanwhile, US Trade Representative Robert Lighthizer told reporters that a free trade agreement with the UK was “extremely likely”. The upbeat comments from both sides of the Atlantic were the trigger the pound to dollar rate needed to shoot above the 1.36 level for the first time since May 2018.
By yesterday evening, however, the mood in Brussels had begun to sour. Suddenly, we were being told by Boris Johnson that negotiations are in a “serious situation” and a no deal scenario was “very likely”. It wasn’t just the PM doing a U-turn; the EU quickly changed its tune, with Commission head Ursula von der Leyen saying bridging “big differences” would be “very challenging”. The pound vs dollar rate didn’t take kindly to the downbeat assessment, falling comfortably below the 1.36 level.
The Bank of England voted unanimously to leave UK interest rates on hold at the lowest levels on record (0.1%) during its latest Monetary Policy Committee meeting. The Bank also announced that its stimulus programme will remain unchanged, having injected an additional £150bn into the economy last month. Both decisions were delivered against a backdrop of soaring coronavirus infections and what it described as an “unusually uncertain” economic outlook.
This morning’s UK Retail Sales figures revealed a 3.8% dip in activity last month. Thankfully, it wasn’t all doom and gloom on the high street in November – when a four-week lockdown in England closed stores selling non-essential goods – with the measure of total receipts of retail stores falling less than forecast.
The consumer confidence index from market research firm GfK – a gauge of confidence among British consumers – leapt by the most in eight years in December, boosted by the rollout of the UK’s COVID-19 vaccine programme.
Dollar dealt a blow by stimulus and Brexit hopes
The dollar was under the cosh on Thursday, falling to its lowest level in over two years against the pound. The Federal Reserve’s decision to stick to its current monetary policy guns, together with hopes for more US stimulus and a post-Brexit trade deal, boosted appetite for riskier currencies – sending the safe haven dollar lower.
A mixed bag of US economic releases had little impact on the dollar yesterday. On the upside, US homebuilding and permits increased solidly in November, signalling sustained housing market strength. On the downside, new US jobless claims surged to 885,000 last week, while the Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey dipped sharply to 11.1 in December from 26.3 in November.
With two weeks to go before the UK leaves EU trading rules, the European parliament has told Michel Barnier an agreement needs to be reached by midnight on Sunday. This would give it enough time to hold a consent vote before the year is out.
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