Monex: GBP exchange rate drops due to concerns aboutBritish coronavirus mutation

December 21, 2020

This is a commentary by Ranko Berich, Head of Research at Monex Europe, on the USD, EUR and GBP exchange rates.

GBP

Sterling sits 1.8% lower this morning against the US dollar as the pound plummets on news of tighter Tier 4 restrictions in London, the South, and the South East of England, while Brexit negotiations continue to be extended as hurdles from fishing rights and government subsidies remain. The latest set of restrictions see the South of England’s Christmas plans cancelled as households are unable to mix and the hospitality sector is shut completely apart from delivery service. The latest restrictions brought about by a new strain of Covid-19, which is assumed to transmit at a faster pace than the previous strain, has also seen the UK placed on an international travel ban by many countries including neighbouring Europe. In addition to this, access of goods trade between the UK and Europe via France has been shut down for 48 hours in order to assess the transmission via cargo. The two-pronged shock of additional restrictions and continued Brexit uncertainty hangs over sterling’s head this week as markets assess whether any upside relief will be forthcoming before liquidity conditions dry up over the Christmas period.

EUR

With most of the euro’s price action from this morning likely being related to headlines outside of the eurozone, the euro is hopping along on the safe haven train, although to a lesser extent than the formal safe haven currencies USD, JPY and CHF. Against all other G10 currencies, however, the euro rallied this morning. Italy, the Netherlands and Belgium closed their borders to the UK as a response to the virus news, and other EU states are preparing to follow suit. EURUSD is still heading into the final weeks of the year around highs last seen in April 2018, with a further uptrend likely over the medium term as vaccines become widely available and the broader dollar bear trend seen over the past weeks continues. For today, the focus turns to advance eurozone consumer confidence at 15:00 GMT. 

USD

The safe haven dollar started the week entirely in the green vs G10 currencies as markets digest news from the UK regarding the 70% more infectious strain of coronavirus and another missed Brexit deadline over the weekend. Amid the crystal clear risk-off mood in markets, headlines from the US around the fiscal stimulus bill, despite being a major breakthrough, may have gone unnoticed. Congress reached a deal on a roughly $900bn pandemic relief plan. Senate Majority Leader Mitch McConnell, Senate Democratic leader Chuck Schumer and House Speaker Nancy Pelosi announced the accord on Sunday. The plan includes $600bn of direct payments and $300bn weekly payments in enhanced unemployment benefits through march. Programmes that were set to expire on Dec 26 would also continue. Additionally, there would be a $284bn plan for the Paycheck Protection Program providing loans to small businesses. Today, the House is expected to vote on the bill, followed by the Senate. While markets are likely to take further cues from developments in risk sentiment today, the dollar may find further support in the vote by the House and Senate as the fiscal bill provides security to the unemployed and will have supporting effects on current consumption and further growth in the recovery phase.