Sterling enters the New Year on the front foot

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2 January 2020

thomasdodds

2020 has begun and it promises to be another very hectic one in the currency markets.

S
terling is very likely to be driven almost entirely by Brexit once again. The pound climbed to a two-week high back above the 1.32 level during thin New Years Eve trading, its sixth consecutive session of gains. The good end to the year for the UK currency can largely be attributed to a reversal in profit-taking trades and investor comfort that a hard Brexit at the end of the month has been avoided.

The key this year will now be whether or not a full agreement can be reached in time for the end of the transition period, or if an extension beyond 31st December 2020 is required. The Prime Minister has until the end of June to ask for said extension, or risk crashing out of the bloc at the end of December. Should it become clear that a cliff-edge exit is back on the table at the end of the year then we may begin seeing some weakness in the pound.

In the immediate term, the next two days will see the latest manufacturing PMI (Thursday) and construction PMI (Friday).

Euro consolidates gains after strong rally

The euro had a similarly strong end to 2019, rallying by over one percent in the few days in between Christmas and the New Year.

Thin trading during the holiday season can be attributed to much of the volatility in the major cross, which has been well supported by the general improvement in optimism towards global growth and trade. The phase one deal over trade between the US and China is now all but signed, which bodes well for a full-blown agreement in the coming months.

Our expectations for an improvement in European data this year ensures that we think that the ECB will now likely hold policy steady for the foreseeable future, which should continue to support the common currency. It remains the case that the Federal Reserve has much more room to cut interest rates than the European Central Bank. Stable rates from both banks would, therefore, be supportive of a higher EUR/USD this year, in our view.

The next couple of days should, however, be relatively quiet as investors return to their desks following the long holiday break. Eurozone PMI data will probably therefore go largely under the radar.