The pound retreated against the dollar on Friday, trading as high as $1.3538 before closing at $1.3431. For the week, sterling has closed higher against the dollar for the fourth consecutive week on optimism that the European Union and The United Kingdom will reach a deal to leave the European Union.
Simon Harvey, currency analyst at broker Monex Europe, said sterling’s high suggested “the market is gearing up for a post-Brexit trade deal over the weekend.” Traders’ nervousness was also reflected in the derivatives market, where the one-week implied volatility index rose to 13.5 per cent, its highest since March.
All eyes are on the words of EUROcrats. They said on Friday that an agreement could eventually be reached by the end of the week, although London insisted that negotiations remained “very difficult”.
In addition, a brexit briefing for EU ambassadors by Michel Barnier, the EU’s chief brexit negotiator, will not take place on Friday “because of intense negotiations in London.”
However, a joint statement from the UK and EU’s Brexit negotiators said: “After a week of intense negotiations in London, the two chief negotiators agreed today that significant differences on fair competition, governance and fisheries had not been met. On this basis, the two sides agreed to suspend the talks in order to brief their heads on the progress of the negotiations.”
Investors are now focused on the latest development in the Brexit deal. While the latest deadline appears to be the end of the week, investors are also looking forward to a virtual summit of eu leaders on December 10 solstice 11, which could also be seen as the final date for signing a deal, Reuters said. However, many of the self-imposed deadlines have been missed and issues such as fisheries and state subsidies remain unresolved.
“You can imagine they won’t reach any agreement before the end of the transition period on January 1, and they will continue to negotiate some form of trade agreement after the UK leaves the EU without a deal,” said Marshall Gittler, head of investment research at BDSwiss Group. “Sterling is expected to remain volatile,” says Gittler.
Shaun Osborne at Scotiabank said if sterling holds above the 1.35 mark and the December 2019 high of 1.3514, there will be no major resistance until the 76.4 percent Fibonacci retraceback of its July 2018 fall at 1.3677
“The biggest development on Friday afternoon was when I told clients there had been a ‘fake breakthrough’ in sterling,” said Erik Bregar, head of foreign Exchange strategy at Exchange Bank of Canada. He was referring to the possibility of a brexit deal, which has been suspended, “which leads me to expect a further slide in the market.”
On the currency front, as FX168 noted earlier in the article, the dollar suffered heavy selling. As a result, analysts say both a new round of U.S. fiscal stimulus and more action by the Federal Reserve will weigh on the dollar.
Investors have recently turned heavily bearish on the dollar, betting that U.S. interest rates will stay low for an extended period, forcing yield-hungry investors to seek better returns elsewhere.
Analysts at MUFG wrote in a note that another bad week for the dollar will encourage speculators to rebuild their short dollar positions, which have been trimmed in recent months.
The euro has been one of the biggest beneficiaries of the dollar’s recent weakness, breaking through the 1.20 mark this week with a weekly gain of about 1.32%. But markets will also be focused on next week’s DECISION by the European Central Bank, which is widely expected to step up stimulus, before which the euro could return to support around the 1.20 mark.
“The euro has stayed above $1.21 for the first time since the spring of 2018, even though the ECB is expected to step up its policy stimulus a week from now,” said Jane Foley, strategist at Rabobank in London.
The ECB is widely expected to extend its 1.35 trillion euro emergency bond-buying program for six months and expand it by 500 billion euros ($608 billion) at its December 10 meeting, as well as to make new long-term loans available to banks and extend the period for which they can receive additional incentives to provide physical credit.