Strategists say much of the optimism over a Brexit trade deal was already baked into the price of sterling.
For almost half a decade, the pound has been whipped by Brexit negotiations – but news that a trade deal has been reached will slow its progress.
Sterling rose 0.3% against the dollar to $ 1.3533 per share. 15:43 in London, having previously risen as much as 0.9%. Strategists say much of the optimism is already baked in, with the currency rising almost 10% since the end of June, while the relative cost of hedging the pound weak in the next year is at its lowest since March.
Coronavirus and the country’s bleak economic outlook have also moved into Brexit’s influence, while investors say the limited scope of the deal – which does not apply to financial services and the services sector – limits benefits to UK assets.
“The reality is that a deal – while good news in isolation, avoiding tariffs, etc. – does not compensate for trade frictions, while the UK suffers disproportionately much from Covid constraints due to the importance and importance of the service sector,” said Jeremy Stretch, head of Group-of -10 currency research at the Canadian Imperial Bank of Commerce in London.
The breakthrough covers more than four years of unmanageable negotiations since Britain’s referendum on EU membership, creating a new era of trade relations between Britain and the bloc. Uncertainty about the future and the expected economic damage from Brexit have kept the pound in captivity below its range before the vote.
A deal is “temporarily bullish for sterling, but we think most of the good news is in the price and suggests taking profits around $ 1.36,” Sheena Shah, currency strategist at Morgan Stanley, said before the announcement. “The many uncertainties for the pound – locally and globally – make us expect it to be an underperformer most of 2021.”
Despite the holiday break, the demand for the pound from institutional investors was seen during the Asia session, according to a Europe-based trader who asked not to be identified because he is not authorized to speak in public.
Manuel Oliveri, a currency strategist at Credit Agricole, said participation may be low because many customers have already closed their books for the year.