The Pound started the year off well following the announcement of UK-EU trade deal just before Christmas but then started to struggle as Covid-19 cases continue to rise. Against the Euro the pound fell by just over one percent and had similar results against the Dollar though did hit a high since May 2018 in the early hours of Monday morning. The response of the pound to the post-Brexit trade deal has disappointed many investors who were hoping for a decisive rally as the four-year process came to an end. Though a positive from this is the uncertainty is now over and this may lead to an inflow of foreign investment into the UK which was previously on hold. If so, the Pound will get a boost due to the increased demand in the currency. Boris Johnson announced another 6-week national lockdown in England on Monday evening, but this didn’t have an affect on the Pound as it had been so well signaled during the day.
The Dollar started the year much as it ended as it continued to slide against its trading partners. After falling more than 6% in 2020 the Dollar index saw its lowest level since 2018 of 89.51 on Monday. US equities continue to perform well, especially in the tech sector which has led to many investors having underweight positions in cash and bonds, according to a buyside survey cash positions are now underweight for the first time since 2013. The Dollar is the first G10 currency to face a risk event in 2021 with the rerun of the Georgia senate election on Tuesday. The republicans are expected to hold the two seats but a flip for the Democrats could lead to tighter regulatory control over the tech sector and a sell-off in equities leading to increased cash positions and Dollar strength. The Greenbacks has a busy week data wise starting off with ISM Manufacturing PMI on Tuesday, ADP Employment change and FOMC minutes on Wednesday, ISM Services PMI on Thursday and Nonfarm Payrolls on Friday.
The Euro increased by over half a percent against the Dollar on the first the trading day of the new year. Many analysts saw this move come more off the back of Dollar weakness than any real Euro strength as the Dollar has an inverse relationship with investor sentiment so as global equity markets increased, the Euro in turn increased against the Dollar. The Euro is likely to continue to react to the Dollar price action as it faces far less risk events now that Brexit is over. The key driver for the Euro will be how Covid-19 is handled and the single-currency will receive a boost if EU countries are able to start removing restrictions before the US and UK. Data wise, the euro starts of the week with German Retail sales which beat expectations at 5.6% compared to expectations of 3.9%. Wednesday will see the release of German Harmonized Index of Consumer Prices and Thursday will bring Euro Retail Sales and CPI.
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