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No-deal Brexit looms over Sterling

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By Han Tan, Market Analyst at FXTM

Prime Minister Boris Johnson has issued a stark warning asking his side of the English Channel to prepare for a hard Brexit. Despite this, GBPUSD is still holding at around 1.33.

The binary outcome (deal or no-deal) is on a knife’s edge which potentially sets the Pound up for an outsized move once the Brexit saga reaches its finale.

The fact that Sterling hasn’t yet capitulated against the US Dollar indicates that there’s still enough pent-up hope that a Brexit trade deal will be secured before the December 31 deadline.

There are also reports of a contingency plan being drafted in Brussels that would maintain air and road connectivity between the UK and the EU. If enacted, such measures are expected to blunt the economic fallout from a no-deal Brexit and this is also helping limit Sterling’s immediate downside.

 

Pound weaker against most major currencies

To be clear, Sterling weakened against all of its G10 peers this week, while also posting a weekly loss against all major Asian currencies. Amid fading hopes of a Brexit trade deal, the Pound has clearly ceded ground to the broader FX complex.

The worst-case scenario of a no-deal Brexit risks Cable erasing much of the 4% gap that currently sits between current levels and its 200-day simple moving average over the coming months.

On the flip side, a last-minute deal could see the pair breaching the long-term resistance level of 1.35, though the runway to the upside appears shorter compared to the downside.

 

Euro enjoying tailwinds

The Euro is expected to fare better than Sterling in the event of a no-deal Brexit and it is no surprise that EURGBP strengthened by 1.26% on Thursday, registering its biggest single-day advance in three months.

The single currency’s fortunes have also been aided by the bloc’s approval of its Recovery Fund stimulus plans after overcoming resistance from Hungary and Poland, along with the ECB’s comments suggesting that the central bank may not need to deploy all of its policy firepower.

Still, a last-ditch Brexit trade deal could unwind some of those gains in EURGBP, while a no-deal outcome may send the currency pair surging towards 0.93 in the immediate aftermath.

 

US fiscal stimulus key driver of risk sentiment

Besides the gripping developments surrounding Brexit’s final chapter, investors around the world are monitoring developments around the next round of US fiscal stimulus. The S&P 500 and the Dow Jones index futures are little changed as these US benchmark indices attempt to stem two consecutive days of losses. Asian stocks were a mixed bag early Friday.

Thursday’s release of the US weekly jobless data shows a disturbing uptick in initial and continuing claims. Coupled with last week’s underwhelming November non-farm payrolls (NFP) print, such unsettling readings of the jobs market should really light a fire under squabbling politicians and get them to roll out more financial support for the economy.

Otherwise, the US risks bearing permanent scars that could really hobble its ability to move into the post-pandemic era.

Should a US fiscal stimulus deal be agreed by year-end, this could set the stage for a Santa rally and propel equity benchmarks to new record highs. Such ambitions could also be buffered if the respective Covid-19 vaccines by Pfizer and Moderna are green-lighted for emergency-use application by the FDA in the days ahead.

 

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