The pound spent yesterday morning reversing last week’s losses against the dollar. It was pushed higher by the EU and UK’s decision to “go the extra mile” and continue Brexit trade negotiations beyond Sunday’s deadline. It was a firm push, causing the pound to dollar rate to rally sharply from the lower reaches of the 1.32 level into 1.34 territory.
An easing of no-deal rhetoric added weight to its resurgence: on Sunday Boris Johnson said it was “the most likely” outcome, but by Monday Downing Street was slightly more optimistic, saying it was a “potential outcome”. The EU’s chief Brexit negotiator, Michel Barnier got in on the act, stating that there is a “narrow path” to a trade deal with the UK in the coming days – provided breakthroughs can be made in difficult areas like fishing.
However, the negotiator’s recent track record led many analysts to suggest the pound’s rally might be short-lived. Hopes that a deal is around the corner have been repeatedly dashed; and with the clock ticking to break the deadlock, the risk of the UK walking away without one is increasing by the day – leaving the market on tenterhooks.
By yesterday afternoon they were proved right, as the pound’s gains were capped by the political logjam that is the Brexit trade talks, as well as disappointing jobs figures released this morning – causing the pound vs dollar rate to slide back below the 1.34 level. UK unemployment rose in the three months to October and redundancies reached a record high, amid warnings London’s surge in coronavirus cases will worsen the situation. Employment fell at its fastest pace in a decade from near-record highs a year ago.
Dollar Falls as Risk Appetite Rises
The dollar did the opposite to the pound yesterday, reversing its gains from Friday. Renewed hopes of a Brexit deal and fiscal stimulus in the US, as well as progress on COVID-19 vaccines, reduced its safe haven appeal – sending it lower. This came in stark contrast to Friday’s headlines, which suggested US fiscal stimulus could be delayed amid a surge in COVID-19 cases.
Is there light at the end of the Brexit transition tunnel? While the negotiators are still talking, hope remains that they can find a path to success – although time is rapidly running out. Economic data has taken a backseat to the Brexit rollercoaster but remains a consideration for investors in the pound. Tomorrow’s Consumer Price Index (PMI) and Markit Services PMI will provide an indication of UK economic health.
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