IFX Market Report: Monday 4th January 2021

As Britain embarks on a new era of life without the EU, the Pound is soaring, reaching nearly 3-year highs against the U.S. Dollar this morning. Cable was able to reach as high as 1.3688 this morning, a level not seen since 1st May 2018. This rally is a direct result of the UK and EU agreeing a trade deal on Christmas eve – the markets seem to have become increasingly optimistic about the Pounds outlook now years of complicated Brexit issues cease to be a problem.

Last Thursday GBPUSD opened the session at 1.3653, and with little price action in the day, finished at 1,3664.

EURUSD in contrast made some losses on new years eve. The pair opened the day at 1.2291 but quickly came under some pressure and closed at 1.2230.

GBPEUR on the other hand was able to gain some ground from where it opened. The pair started the day at 1.1107 and closed at 1.1172. The pair continues to trade well this morning, reaching as high as 1.1168.

This year for Sterling will prove to be complex – there seems to be many factors both for and against Sterling. The Pound has been hindered for years by uncertainty regarding the UK and EU relationship, now that has been concluded, a more welcoming environment for investment is apparent. The Pound derives a significant amount its value from the inflow of foreign investor capital; thus, Sterling bulls will be hoping investment decisions that were put on hold due to Brexit, will now come back into play. The UK's current account deficit - a result of the country importing more goods and services than it exports - is the primary reason why the inflow of foreign capital into the country is important for Sterling valuations. The larger the deficit the greater the amount of capital inflows required to keep Sterling stable. The UK’s annual current account deficit is at 2.9%, the smallest it has been since Q1 2012. It is agreed that narrowing the deficit could be supportive to Sterling in the year ahead.

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