UK's isolation to leave sterling vulnerable

Rising COVID-19 cases, government wrangling, a widening of tier 4 restrictions in England, increased pressure on the public purse and, in all likelihood, a continuation of negotiations with the EU on areas such as financial services and security suggest the GBP may be unable to shrug off its vulnerability or volatility in 2021, Jane Foley, Senior FX Strategist at Rabobank, briefs.

Key quotes

“While GBP is likely to find support on any news that a trade deal has been struck, it remains likely that any relief rally will be cut short. Firstly, any deal is set to leave many sectors, particularly in services, out in the cold. In addition, the likelihood that larger swathes of the UK will be entering higher ‘tier 4’ restriction to prevent the transmission of the virus will significantly dampen recovery prospects.”

“Assuming a deal is struck we retain our view that EUR/GBP will struggle to push below the 0.89/0.88 area in the coming months. Without a deal, we expect EUR/GBP to rise to 0.93/0.95 dependent on whether the door is left open for talks on some sectors next year.”

“A catalogue of policy U-turns this year has seen Tory MPs revolting against their own leader and left Johnson deeply unpopular within his own party. The months ahead could prove to be tricky for the PM and this could be reflected in more volatility for the pound.”

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