US dollar trades lower as investors cheer vaccine news

The US dollar traded lower against almost all of its major peers on Tuesday, as investors once again began favouring riskier assets amid encouraging news of progress towards multiple COVID-19 vaccines.

There is now real optimism that high risk groups in some of the major developed nations could begin receiving inoculations within the next few weeks. This could spell an end to lockdown restrictions and a return to something closer to normality in many countries by spring 2021. While a vaccine will not trigger an overnight return to normal levels of economic activity, investors can see light at the end of the tunnel and have begun unwinding some of their safe-haven flows and instead buying those currencies deemed as higher risk.

Among the major currencies, the euro jumped above the 1.19 level this morning - only the third time it has done so since the beginning of September. The traditional greater risk Aussie and New Zealand dollars have also leapt higher so far this week, with the latter now trading at its strongest position since June 2018. The Thanksgiving holiday in the US this week has created a period of relatively thin liquidity trading, as investors step away from their desks to spend time with families. That is likely at least part of the reason why we’re seeing such volatile moves in FX in the last few days relative to the previous couple of weeks, as has tended to be the case during Thanksgiving holiday weeks in the past.

Revised third quarter GDP data out of the US this afternoon is unlikely to rock the boat. We will instead be looking towards tonight’s FOMC meeting minutes as one of the likely main movers today.

Sterling continues to march higher on vaccine, Brexit optimism

The pound has continued to outperform most of its major peers this week thus far amid a raft of positive news in favour of the UK currency.

PM Boris Johnson stated yesterday that he hoped all high risk individuals in Britain would be vaccinated by the spring, with many of those in the very highest risk group to receive it before Christmas. Not only is the UK at the front of the queue for the Oxford vaccine, but Britain has also ordered more quantities of COVID vaccine doses than any other country or economic area in the world, aside from Australia and Canada. This, investors believe, may allow the UK economy to bounce back quicker and to a greater extent than most of its major counterparts in the first half of 2021.

Aside from the vaccine news, investors appear quietly confident that a ‘no deal’ Brexit will be avoided in the coming weeks. While talks are inevitably set to run deep into the eleventh hour, EU officials have noted in the past few days that 95% of the deal is done, with only a few issues to iron out. With Bank of England governor Andrew Bailey warning yesterday that a ‘no deal’ would have a more devastating impact on the UK economy than covid, we see almost no chance that the UK government would walk away from the negotiating table without a full agreement in place. This would undoubtedly be good news for sterling, so further upside for the currency remains on the cards before year-end, in our view.

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