South East UK enters harsh lockdown, Brexit agreement drifts again, Biden begins to lay out his vision

Dec 21 • Market Commentaries • 1072 Views • Comments Off on South East UK enters harsh lockdown, Brexit agreement drifts again, Biden begins to lay out his vision

The UK pound is likely to come under intense scrutiny during the week leading up to the Xmas holidays. On Saturday, December 19, the UK prime minister announced that a vast area of the UK would enter a tier 4 system: the harshest Coronavirus lockdown criteria.

London and the surrounding counties are now under legal limits of movement, a decision which will get reviewed on December 30. Transport in and out of the capital, non-essential retailers, and any form of leisure outlets are closed, and various EU countries have quickly moved to prevent air travel from the UK. Coming so close to the Xmas shopping rush the leading quoted retailers on the FTSE 100 and FTSE 500 are likely to suffer significant variance in price while the lockdown remains in place.

The price of GBP will experience fluctuations in wide ranges this week as many analysts and market commentators begin speculating that the UK’s central bank the BoE will have no option to lower the UK’s base interest rate into negative territory early in 2021. The UK govt might also step in to support the businesses lost in the South East and London.

The price of GBP will get hit from two angles during the week: Coronavirus and Brexit. The negotiating teams of the UK and EU assured markets and various parties to the negotiations that a resolution would exist by the evening of Sunday, December 20. But once again, another date has slipped.

Unless the UK requests a reprieve and further extension to the January 1 Brexit, then the country will have no deal in place, and various UK ports will be in chaotic turmoil. The UK is a service and consumer-based economy; therefore, any disruption to the just in time mechanism will have a severe ripple effect throughout the UK economy and society.

GBP/USD (cable) rose by 2.24% during last week’s sessions, and EUR/GBP fell by -1.12%. Versus the safe-haven currencies of CHF and JPY sterling fell by -0.5% and -0.15% illustrating how USD weakness, as opposed to sterling strength, has been in evidence recently. GBP/USD gave up its position above the 1.3500 level-handle during the session on Friday 18 and when markets opened on Sunday evening cable quickly fell to 1.3435 down -1.02%. EUR/GBP traded up 0.77% while retaking the 91.00 level.

With the prospect of a Brexit deal at 50-50% according to betting markets, the direction cable and other GBP currency pairs will take during the week is impossible to predict. Traders need to monitor their current positions, stops, and limits while ensuring they remain tuned into developments over the coming days.

Third-quarter GDP updates for the US and UK will be in focus this week, together with personal income, spending and durable goods orders for the US. The stimulus package the Senate has held back over recent weeks needs to be agreed ASAP, if not then tens of millions of US households will be in severe hardship in January. There are approximately six million households in rent arrears of $6,000 due to the impact of the Coronavirus.

The imminent agreement of the Pandemic Relief Bill has helped US equity markets to rise to record levels over recent weeks, at the expense of the US dollar. USD/CHF is down -3.0% monthly and -9.10% year-to-date. USD/JPY is down -0.50% monthly and -4.90% YTD.

US equity markets and the value of the US dollar and WTI oil may react to Joe Biden’s first detailed president-elect speech delivered on Saturday. The subject was climate change, and many oil companies will have listened intently to Biden’s narrative.

He fired warnings to oil and gas firms that their business model is under threat and would experience intense competition from renewables during his four-year tenure. Oil has risen sharply over recent weeks, and it’ll be fascinating to witness if that momentum continues (once markets open on Monday) after Biden’s statements. The price rise of precious metals during the pandemic has been significant. But in some ways predictable due to the safe-haven appeal of PMs such as Gold and Silver. Gold is up 23% year-to-date, and silver is up 43%, the best combined performance of both metals for many years. Gold could threaten the 1,900 level-handle this week if the risk-on mood on Wall Street fades. Silver could also enjoy a rise with 26.00 the next logical target.

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