The pound bounces as Brexit talks continue (Daily analysis 14.12.2020)

The Pfizer's vaccine was approved for use in the United States. Market participants expect a fiscal deal and hope for a breakthrough in the EU – UK gridlock over a trade deal. The US dollar starts the week on a back foot and risk assets advance.

The EUR/USD pair advances towards 1.2150 mark again. Renewed demand for the common currency has emerged recently as a spat between the EU and Poland and Hungary is over. Moreover, the European Central Bank failed to deliver a dovish surprise last week. Risk environment remains benign: equity futures and commodities soar. The greenback (the US dollar) declines against all G-10 peers with the pound and the Scandies outperforming.

Brexit talks continue

The GBP/USD pair reclaims 1.33 after the UK Prime Minister and European Commission President informed on Sunday, that the talks on a trade deal would be prolonged into next week. Points of contention remain well known and include fishery and the issue of the level playing field. A breakthrough in the nick of time to salvage Great Britain from a chaotic departure from the EU's free market and customs union remains a central scenario for the markets in which the pound sterling should rally further, especially given the scale of uncertainty after weeks of breaking deadlines and no progress in talks.

The euro immune to new restrictions

Milder forms of restrictions have failed to prevent Germany from recording the new COVID-19 infections exceeding 21 thousand. The rapidly worsening epidemic situation calls for more action, and a hard version of lockdown was imposed. It will start on Wednesday and last at least until January 10th. The introduction of new measures to contain the spreading of coronavirus does not stifle the risk appetite and fails to support the US dollar.

This week focus will be mainly on the Brexit talks and efforts to secure a fiscal package worth over 900 billion USD. Another round of positive vaccine news is expected. Investors will monitor monetary policy developments as central banks from the US, UK, Japan, Norway and Switzerland meet.

Conotoxia research team