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Pound edges higher as market awaits Brexit news

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9 December 2020

Written by
Matthew Ryan

Matthew Ryan is Ebury’s Global Head of Market Strategy, based in London, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

The major currencies spent much of yesterday stuck within a relatively narrow range as investors await significant newsflow out in the coming days.

B
rexit talks are entering into a critical period as time ticks down to the end of year deadline for a deal to be struck. PM Boris Johnson will be in Brussels today in the hopes of salvaging a last minute deal, as negotiators continue to fall short in ironing out differences over a handful of key sticking points. News that both parties had reached an agreement in principle over the Withdrawal Agreement, which drops the law-breaking clauses from the Internal Market Bill, is an encouraging development.

While we have seen a bit of a move higher in the pound so far this morning, gains have been hard to come by as investors remain cautious over this week’s negotiations. As we mentioned yesterday, however, the current value of sterling suggests to us that the market is optimistic some form of agreement can be struck that avoids the worst-case ‘no deal’ scenario. We still think that a bare bones deal is far more likely than not, although it will inevitably be agreed at the very last minute.

ECB

German economic sentiment jumps, despite lockdown extension

Investors have not committed to any sizable EUR/USD positions in the past 24 hours or so, instead waiting for tomorrow’s ECB announcement. The euro has been remarkably resilient in the past few days to the prospect of aggressive easing from the ECB this week. Yesterday’s solid data out of Germany certainly helped in this regard. The ZEW economic sentiment index rose sharply for this month, increasing to 55 from the 39 recorded last month. This increased optimism among business leaders is somewhat of a surprise, given Angela Merkel has announced that the soft lockdown in place in Germany will be extended until at least 10th January. There have also been calls for stricter measures to be put in place over the Christmas period. Unlike some of its peers, notably France that has put in place much tougher measures, new virus cases in Germany have failed to drop materially since the imposition of the ‘lockdown light’ at the beginning of November.

Ahead of Thursday’s ECB meeting, we expect Brexit headlines to dominate the narrative, particularly given there are no major economic data releases scheduled out of either side of the Atlantic. You can read more about our expectations ahead of this week’s meeting in our ECB December meeting preview report.

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