The pound was in a celebratory mood on New Year’s Eve, hitting a two-and-a-half-year high against the dollar, as traders took heart from two major developments: UK parliament’s swift approval of the post-Brexit trade deal and growing optimism that Britain can overcome the coronavirus within months.
The Brexit deal – which was achieved at the eleventh hour – is considered a little “thin” in places, but markets still breathed a sigh of relief that the UK economy avoided a no-deal cliff edge – and that relief was reflected in the pound to dollar’s performance, which advanced to its highest level since May 2018.
Despite coronavirus infection rates rising sharply across Britain during December – accelerated by a new more infectious strain – traders were encouraged by the approval of AstraZeneca’s game-changing vaccine. This, combined with certainty about the trade deal, is fuelling hopes of a major economic bounce back in the UK this year.
The New Year surge means the pound – which has been plagued by Brexit-related uncertainty since the June 2016 referendum – gained about 3% against the dollar in 2020. And the pair has carried its momentum into 2021, breaking through the 1.37 barrier this morning for the first time since 2018.
Dollar Ends 2020 on a Low
The pound’s performance was given a helping hand by dollar weakness, which has been weighed down by the US Federal Reserve’s loose monetary policy – a move that is designed to combat the economic damage caused by the pandemic. This has been compounded by the rollout of the cheaper, more easily transportable AstraZeneca vaccine, which could provide the catalyst for a robust global recovery – bad news for the safe-haven dollar.
Looking Ahead
The pound is in line for an upbeat start to 2021, after the UK parliament approved a trade deal with the EU and regulators gave backing to AstraZeneca’s vaccine. However, concerns remain over a lack of clarity on the services sector – most notably the crucial banking and financial industries.
Meanwhile, vaccine and fiscal stimulus headwinds rounded off a turbulent year for the dollar, which had soared on its safe-haven status in March, when pandemic panic peaked. Expectations of further stimulus and rising fiscal and current account deficits have the potential to hurt the dollar over the next few months.
The first influential economic data releases of 2021 hit the headlines today: IHS Markit’s Manufacturing Purchasing Managers’ Index for both the UK and US in December.
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