GBP/USD prints fresh 2020 highs in the 1.3620s

GBP/USD printed fresh annual highs in the 1.3620s in recent trade. The pair has been moving higher amid broad USD weakness and has now fully reversed the “sell the fact” losses seen in wake of last week’s Brexit deal agreement that saw the pair drop as low as the 1.3430s. At present, the pair trades with gains in excess of 120 pip or 0.9% on the day.

GBP amongst the G10 outperformers

Pound sterling is one of the best performing G10 currencies on the day on Wednesday, lagging only AUD (which is up 1.0% versus the US dollar). A few positives developments seem to be giving the currency a boost. Firstly, the vaccine news has been good; the AstraZeneca/Oxford University vaccine was approved and will start being distributed next week and the UK has chosen to accelerate the vaccination process by postponing the second Pfizer dose for those who have already received the first dose – this second dose will now be someone else’s first dose (this move makes sense given that the first dose alone is 91% effective in preventing Covid-19 and the second dose only boosts this to 94%!).

The fact that the UK is one of the leading countries globally regarding the percentage of the population already vaccinated could well be a factor that will support GBP going forward. Meanwhile, though there was initially a “sell the fact” reaction when confirmation broke that a Brexit deal had been reached last week, this has now mostly unwound. “The combination of the deal and the vaccine rollouts means the UK macro-outlook for 2021 is much brighter” says Danske Bank, who would not be surprised if the UK economy outperforms the eurozone’s next year. “We stick to our view that the Bank of England will maintain the Bank Rate at +0.1% in the near future and will not cut into negative territory”, says the bank.

Speaking of the Brexit deal; EU leaders signed off on the deal early on during the European session and the deal is currently making its way through the UK Parliament, where it has not yet and is not expected to face any hiccups. Markets expect smooth passage and implementation of the deal which ensures that (relatively) frictionless trade can continue in January 2021.

Risks to GBP

While the above-noted factors, namely the country’s rapid implementation of its mass vaccination programme gives reason to cheer, there are reasons to be cautious. Whilst vaccine news was in the headlines of the UK press on Wednesday, the dominant story was the country’s shift back into tighter lockdown restrictions (most of the country will have been placed in Tier 4, the highest current tier from 00:01GMT on Thursday).

The government is keeping open the possibility that stricter measures could yet be imposed, given the recent surge in new daily reported cases to above 50K. The question of whether or not schools will be allowed to reopen is also being left open. The spread of the new, more transmissible strain is clearly having an impact. Most analysts now see the country remaining in some form or other of relatively strict lockdown throughout at least Q1.

Meanwhile, while Wednesday might have seen a modest return of some Brexit optimism, the same questions regarding the quality/comprehensiveness of the deal still linger. Brexit negotiations will continue in 2021, given there is no deal to cover trade in services, which accounts for 80% of the UK economy, yet.