Pound Remains Weak Despite Post-Brexit Trade Deal

December 29, 2020
Pound Remains Weak Despite Post-Brexit Trade Deal December 29, 2020 Lennox Hamilton

Following the inking of post-Brexit free trade partnership deal between the UK and the EU, the British pound declined by roughly 1% on the first-trading day of the week. Today, the EUR/GBP continued to consolidate at 0.9080 levels.

The reason for the pound’s decline was the market had already ‘priced in’ a deal. Nevertheless, currency strategists anticipate the pound to strengthen in 2021 as the deal considerably wipes off uncertainty.

The selloff has already moderated on Tuesday, a day after the UK markets opened following the Christmas holidays. As a portion of London traders return back, volatility is expected to rise, but the trend would become clear only in January.

Charles Porter, an analyst at SGM Foreign Exchange Ltd., said “FX markets have begun their first proper trading day secure in the knowledge that the United Kingdom will have a trade deal above WTO standards with respect to the EU-27 come 1st January. So far there hasn’t been a huge sigh of relief evident within the Pound but it is evident that, in combination with Trump signing a fiscal stimulus bill to prevent US government lockdown, markets are embracing less defensive conditions.”

Interestingly, analysts had anticipated a sharp rally of the pound following the attainment of a post-Brexit deal, but have not materialized so far. Analysts believe that the pound will stay under pressure in the short-term.

Even though the EUR/GBP exchange rate opened with a 0.20% gain at 1.1039 Monday, it started declining later in the day to trade with a loss of 0.92%. It seems the market had made a bullish pricing with the expectation of a deal in place.

With respect to future pricing, Gavin Friend, Senior Market Strategist at NAB in London, said “We’ve consistently thought a deal would take place and since late July we’ve held a 1.36 end-December forecast. Consistent with our lower USD view, have forecast GBP/USD moving above 1.40 into 2021 and in our latest FX update we have 1.42 for GBP/USD end Q1, 2021.”

Gavin Friend also said:

“Another reason why we see GBP not rallying strongly against the EUR is the UK will see some negative economic impact from its decision to exit the EU area. The UK’s independent Office for Budget Responsibility has forecast the UK will see a 4% loss in economic growth over fifteen years, than otherwise would have been the case if the UK had stayed in the EU. The true extent of any output loss will become clearer in time and after the initial euphoria of a deal has faded. The UK is, after all, a service-based economy and this deal is predominately – though not exclusively – one for goods.”

The statement of Friend indicates that the rise of the pound will be slower.

The UK Parliament is anticipated to endorse the agreement sometime this week as the members of the Conservative Part and also the Labour Party have given their approval to the deal.
The agreement between the EU and the UK guarantees “zero tariffs and quotas on all goods that comply with the appropriate rules of origin.”

Notably, the agreement does not cover services sector, which represents more than 70% of the UK economic output. Furthermore, the deal does not maintain aspects of single market and also customs Union that aid economic growth.

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