New Covid Strain, Brexit trade deadline and what next for the pound

After the weekend’s news that London and many other parts of the UK have been plunged into tier 4 lockdowns, that a new Covid strain is rampant in London and the South East, that a growing number of countries are closing their boarders to UK flights, tourists and freight and that Christmas has been dramatically altered for businesses and consumers alike, the question now is, will the combined effect of this escalation in the UK’s Covid fight knock the pound off course? 

How far could the pound fall?

This time last week we were looking at life above $1.36 as traders looked through the UK/EU rhetoric and priced in the potential for a trade deal. In early trading on Sunday GBP/USD dropped by 115 points, we can assume that the sell-off will accelerate when Europe starts trading. This sell off may not be precipitous, however, and we would not advise jumping on the bandwagon of pound sellers if you decide to have a lazy Monday morning. The double whammy of lower levels of liquidity due to the Christmas holidays and an ever changing news flow could impact what the pound does on Monday. However, two key levels in GBP/USD to watch include $1.3330 – the low from last week, and then $1.3260 – the 38.2% retracement of the Sept low to Dec high in GBP/USD. $1.3160 – the low from 11th December and the 50% retracement of the same move, is also a key support level in the current environment. 

What it means for UK exporters and the FTSE 

The severity of the latest round of lockdowns, and the fact that the port of Dover has halted all vehicles crossing into France, including freight vehicles, for 48 hours, could disrupt UK stock markets. While the biggest exporters such as GlaxoSmithKline, Rio Tinto and Johnson Matthey are unlikely to see an impact on their business, Chemring and Renishaw, two big exporters on the FTSE 250 could see some decline in their share prices at the start of this Christmas week. Of course, UK exporters such as Chemring and Renishaw were also at risk from the rising pound, so if we see the pound fall, and the closure of borders to UK freight a temporary phenomenon only, then these companies could recover any lost ground quickly. The biggest risk is if the new Covid strain threatens the UK’s ability to get hold of the Pfizer/ BioNTech vaccine. If this is disrupted it would deal a big blow to the UK government’s roll out of the vaccine and could make life very difficult for the thousands of us living in the toughest tier of lockdown restrictions. This may put pressure on the Oxford/ Astra Zeneca vaccine to get faster approval/ go through more efficient testing, in order to have a home-grown vaccine available sooner rather than later. 

Could Brexit be delayed? 

Of course, when we talk about the pound, we can’t forget about Brexit trade talks. The latest deadline expired at midnight on Sunday, and both sides have said that this deadline will be extended, again. This seems like typical kicking the can down the road. We had expected that a deal would not be complete until the very last moment before the deadline on 1st January, however, with public holidays and lockdowns in the UK and across Europe now looming, then we could see one of two outcomes. Firstly, a no deal Brexit, which would lead to a short-term shock to the UK economy, a sharp fall in the pound and a deep UK recession. Secondly, we could see the 1st January deadline moved out due to the UK government focusing its attention on Covid, or we could see some transitionary trade deal agreed. Currently it seems that fishing rights post the 1st January are the biggest cause of concern, we remain hopeful that this wrangle is merely symbolic due to the long history of fishing disputes between the UK and the EU. Thus, unless we get some evidence that the UK is serious about leaving without a deal in 10 days’ time, then we remain optimistic another solution, rather than no deal, will materialise.  

EUR could also be at risk as FX market takes another look at the dollar 

If, as we expect, some extension of the deadline, or transitionary trade deal, is reached then we could see limited pound downside in the next two weeks. If an extension to the talks is agreed into January 2021, then we may even see the pound stage a very late December rally. It’s also worth remembering that there could be downside for the EUR in the coming days. While Europe is closing its boarders to the UK, there are signs that the new strain of Covid has already been found in multiple locations in Europe, albeit in smaller numbers than in the UK. Thus, we believe that attempts to cut links to the UK may have come too late, and parts of Europe could face the same levels of the new strain of the coronavirus as the UK in the coming weeks. If cases of the new strain rise in Europe, then we could see European stocks and the euro struggle in the coming days. EUR/USD is also down 50 points at the open, and EUR/GBP is only up 0.5%. Overall, we remain in the red zone for this pandemic, and we could see the FX market, in particular, start to exhibit jitters, and the dollar start to rise as we move towards Christmas.

Early Christmas present from Washington could bolster global stocks 

Global stock markets may hold up better in the face of the new Covid strain due to the news late on Sunday that the US Congress had finally agreed to a $900bn stimulus plan. The timing of final Senate votes are still uncertain, but the plan is likely to mean another $600 cheque mailed to most Americans and $300 per week in enhanced unemployment benefits. The package could also include a $1.4 trillion annual spending pledge, and the deal must be agreed by Monday before the end of year spending deadline looms.

At the start of a new trading week European traders must decide if it is US fiscal spending or the new coronavirus strain that will dominate action on financial markets. Right now, we think that the US news could help to bolster sentiment for global stock markets even though Covid worries abound.