Foreign Exchange Markets Suffer Brexit Anti-Climax

 

The last month on the foreign exchange markets has mainly been summed up by two words “anticipation” and “anti-climax”.  The three dominating events – the Brexit Deadline, the US Presidential Election and Covid, were still the driving forces behind market movements and so the major currencies keenly anticipated the outcomes of these highly important events.

 

 

Written exclusively for Expat Network by Tom Arnold of Currency Index

 

For those with currency requirements involving Sterling the focus was on the 31st of December Brexit Deadline. The expectation was that a No Deal result could cause a dramatic drop for the Pound, with the alternative of an agreed Free Trade Agreement causing Sterling to push up. As is often the way with the foreign exchange markets, events confounded expectations and the much hoped for FTA was agreed, ratified and signed ahead of the deadline, and instead of the anticipated increase in Sterling strength, there was next to no movement at all.

The Pound in fact dropped a couple of cents in the following days and continues to struggle across the board against the Euro and Dollar as well as many of the other widely traded currencies. The reality is that while the FTA is great news, there are still many areas of concern and many “Brexit Realities” for the UK and Europe to face, so the hoped for promised land of a “good deal for all”, in fact is probably just the start of another long-winded process of negotiation on multiple small facets of the ongoing working relationship.

Another impact on the hoped-for Brexit boost for the Pound, has been the Covid pandemic. It would seem very unlikely that a currency could significantly surge in strength at the same time as its country entered a third lockdown, with daily Covid figures worse than at any point since the pandemic began.

The Pound has failed to live up to expectations and a combination of these two factors is definitely the reason.

The US Dollar has had a mixed month too, with significant weakness coming off the back of the “contested” election result. The markets hate uncertainty and the 60+ legal cases brought by the Trump campaign, together with his refusal to concede defeat, led to massive uncertainty for the US economy, and so the Dollar weakened. Both the Euro and even the Pound managed to push the Dollar back by around 3-4 cents.

In the last week we have seen some unbelievable events in the US, but critically we have now reached a period of certainty. Congress has confirmed President-elect Biden’s election win, President Trump has agreed to a transition of power, and the Democrats have taken control of both houses following the Georgia Senate votes, giving Biden an easier route to getting his agenda delivered. As a result, the Dollar has been able to push back its recent losses, albeit not completely. Whether President Trump sees out the last days of his Presidency, will probably not impact the currency markets too much, but it could be that further Dollar strength is dependent on Biden’s inauguration actually happening.

So, what could have been the foreign exchange markets equivalent to the various New Year’s Eve fireworks displays, really didn’t live up to the hype and we are left with a massive sense of anti-climax, given the months and years some of these events have dominated the world stage. We wait to see how long the current Covid lockdowns last and when we can maybe expect some normality to return and in the meantime the currency markets seem unwilling to make any big moves.