GBP/USD languishes close to lows of the day at 1.3450

It’s been a rough day for sterling, with GBP/USD slumping more than 0.6% to around 1.3450 having previously traded above the 1.3550 mark during Monday Asia Pacific trade. The pair is down over 80 pips on the day, with strength in the US dollar that saw the Dollar Index rise from 90.00 lows to the 90.30s and strength in the euro that saw EUR/GBP rise to around 90.80 from under 90.00 weighing on GBP.

Sterling consolidates at lows

GBP/USD has been going sideways for the most part in recent trade around the 1.3450 mark as traders mull what’s next for the pair. Bulls will have felt disappointed with the reaction of the past few days to the announcement of the Brexit deal, which has ended up as more of a “sell the fact” reaction, than confirmation of a deal rally. Clearly, as traders had time to explore the details of the deal that was reached, they have not overly liked what they have seen;

Andreas Steno Larsen, global chief FX and rates strategist at Nordea in Copenhagen argues that “this is markets slowly but surely acknowledging that this is not an optimal deal for the UK”. On the deal itself, Larsen continued that “this is rather a very slim deal that merely avoids the cliff-edge but there are still large gaps that will have to be dealt with in 2021 and frictionless trade is not secured”.

Moreover, tentativeness to see how the transition from being in the EU single market (as the UK currently is) to the new trading arrangement goes (how bad are the disruptions at the ports, etc.) is likely keeping GBP bulls on the sidelines. The above factors combined perhaps with an element of post-deal position squaring (i.e. taking profit on longs) seems to have weighed.

It cannot be ruled out that Covid-19 pessimism is also weighing; there is lots of chatter in UK political circles right now about keeping schools closed in January and potentially moving back to March style lockdowns (i.e. stricter than the November lockdown) to contain surging cases; new infections were over 40K for the first time on Monday and surging Covid-19 cases are coinciding with the usual Covid-19 pressures that typically put the NHS under pressure around this time of year.

But on the optimistic side, the UK could announce regulatory approval for the AstraZeneca/Oxford University vaccine within days, which is being hailed as a game-changer in the fight against the pandemic given the vaccine’s lower cost and greater ease of distribution (it can be stored for long period of time at normal refrigeration temperatures. This could drastically accelerate the UK’s already ahead of the curve vaccination programme that has already jabbed more than 700K people.