The UK and EU finalized a free trade agreement covering goods which will come into effect at 11:00 GMT on December 31. EU officials described the end as a "relief" and this is likely to be the market reaction, as well. Cable once again rallied right up to resistance at 1.3620 before retreating. GBP/USD still looks capped around current levels, according to economists at TD Securities. 

Key quotes

“The UK and EU have confirmed they have reached a deal on the goods trade, so as of January 1st, the UK is outside of the EU customs union and single market and will begin to negotiate new bilateral trade agreements with other nations. While this does now provide for zero-tariff trade, firms will need to adjust to the specific rules of origin requirements to take advantage of that. As expected, this deal does not include the service sector like financial services. Though we could still see some further negotiations next year on various sectors given they were outside of the discussions here, most firms will require new branches in the EU in order to maintain access in many service areas.”

“We do not see this as any game-changer for markets. A deal was in the price and the specifics are unlikely to have any bearing on the direction of markets from here. While GBP is very cheap across many of our valuation models and much of the negotiation-linked uncertainty can fade, there is still significant economic underperformance and disruptions to follow early in 2021.”

“We start the year looking to sell GBP on rallies, especially on the non-USD crosses. Overall USD weakness may be able to help cable drift higher through the year, but our current forecasts do not see GBP/USD sustaining gains higher than current levels until the second half of 2021.”

 

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