Jamie Jemmeson
January 4, 2021

Sterling Falls Despite Brexit Trade Deal and Oxford Vaccine

The final weeks of 2020 saw some big and impactful changes that have influenced exchange rates. Firstly, the protracted UK/EU trade talks concluded on Christmas Eve and was subsequently approved by respective parliaments. The market may take some time to decipher the actual impact on the UK economy. The main area where the trade deal falls short is for a equivalence framework between the UK’s and EU’s financial sectors. Considering 43% of the UK’s financial services operate overseas this could impact national GDP figures. Secondly, the UK MHRA regulator approved the Astra Zeneca/Oxford vaccine for use. This vaccine is much easier to distribute than the Pfizer version and the UK has also ordered 100 million doses with the rollout of the vaccine starting this morning. Despite the positive news, Sterling has fallen against the Euro and US Dollar as the UK looks set for another national lockdown.

In the meantime, late in 2020, the Euro gained an element of support from the UK/EU trade deal providing some underlying relief over near-term trade trends. However, ECB Council member Rehn stated that officials are monitoring the Euro’s strength closely. He reiterated that, although the bank does not target exchange rates, appreciation does have important effects as it leads to a loss of competitiveness and affects the outlook for growth and inflation.

Looking to week ahead, the market will be getting its feet back under the table to decipher the current state of play and investment environment. The prospect of further COVID restrictions are possible in the UK and the market will focus to see if these materialise and what measures will likely be taken. In the meantime, there  are some key data releases and events that are set for release.

Monday

  • UK PMI Manufacturing
  • OPEC Meeting

The rollout of the Astra Zeneca/Oxford vaccine has started, but there is a high probability that UK restrictions will escalate as rumours of another national lockdown circulate. In the meantime, the final reading of the UK’s PMI manufacturing is set for release and expected to maintain its level of 57.3, the highest reading since December 2017. However, given the news of further Covid restrictions this may hinder further future advancement.

The OPEC-JMMC meeting is to be hosted and is attended by representatives from the 13 OPEC members and 11 other oil-rich nations. These meetings tend to have a impact on the price of oil and therefore a subsequent impact on inflation.

Tuesday

  • US ISM Manufacturing

The US Institute for Supply Management index on manufacturing is set for release and provides a good barometer of economic activity and its pace. The headline figure is expected to show further expansion albeit at a slower pace than last month.

Wednesday

  • US ADP employment report
  • BoE Gov. Bailey speaks
  • FOMC meeting minutes

Wednesday is a busy day for the market as it will get insight from the Bank of England, the Federal Open Market Committee as well as some insight on how the all-important US employment numbers could look on Friday. The US ADP employment report is set for release ahead of Friday’s US Government’s labour data. Historically, the figure reviews and articulates but rarely causes volatility as the alignment with Friday’s can often been substantially misaligned. However, it is still viewed as a potential signpost of the direction of job growth or contraction. The key highlights given the recent UK/EU trade deal and release of various could be from BoE Gov Carney.  The BoE have forecast that unemployment could hit 7.5% by the middle of the year, it will be interesting to see what his views are considering the seismic events in recent weeks. Finally, the FOMC meeting minutes will provide further insight from the Fed on it view of the economy moving into 2021.

Thursday

  • US Jobless claims
  • US ISM Services PMI

The jobless claims will provide the markets with an indication of the state of the labour market ahead of Friday’s all important job data. In the meantime, the market will also get a indication of how the service sector is performing. The figure is expected to publish another month of expansion, however the pace of growth is forecast to slide.

Friday

  • US Non farm payrolls

The all-important labour data is set for release which will be used to provide the market with an indication of the direction of the US economy. There continues to be big changes in the US with a changing of the guard at the White House, Covid restriction and future governance. In the meantime, the labour data is expected to a weakening picture. Job creation is expected to slide, average earnings is expected to slide whilst the unemployment rate is set to rise.

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