Pound Pops as Curtain Closes on 2020 

- GBP/USD in technical break higher as curtain closes on 2020.
- Lifts above major chart level & poises for further gains in 2021.
- GBP/EUR lags with -6.6% 2020 fall as Brexit hits statute book.

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Pound Sterling outperformed on New Year's Eve as Britain's new Brexit deal with the EU landed on the statute book following a last minute rush to ratify the pact before the curtain closes on an otherwise coronavirus-contaminated 2020.

Sterling was leading major currencies higher having pulled ahead in a race against the greenback on Thursday, with the Pound-to-Dollar exchange rate lifting above 1.3639, a level that coincides closely with a major Fibonacci retracement of the post-referendum technical downtrend. 

Gains came early in the London session and as prices responded to the overnight ratification of Britain's trade and future relationship agreement with the EU, which stopped the Brexit clock from ticking more than four years after the June 2016 referendum vote to pull out of the European continent's ever-closer-union of countries, economies and peoples. 

"Condemnation from Westminster’s minor parties including the SNP failed to block the Bill with the Ayes to the Right grabbing 521 votes to 73," says Charles Porter, an analyst at SGM FX. "Ultimately the Future Relationship Bill passed through the Commons smoothly ready for royal assent yesterday evening. On standby in Windsor Castle the Queen gave official assent."

Above: Pound Sterling performance against major currencies on Thursday (left) and for 2020 year (right).

The agreement covering trade and various other ties is to be provisionally applied in Europe from Janaury 01, ten minutes after the end of the transition period that had preserved membership conditions including tariff-free trade until 23:50 on Thursday, averting an otherwise default to doing business on terms governed by the World Trade Organization and with Most Favoured Nation Tariffs in effect. A European Council process and parliament vote is expected to ratify it in Europe early in the New Year. 

Averting the cliffedge associated with any failure to approve the pact enabled Sterling to pull ahead of other major currencies on Thursday, even as further vast parts of the UK economy were the subject of draconian restrictions in the name of a so-far failed coronavirus containment effort. And with the Pound-to-Dollar rate having climbed above 1.3639 it would, pending a daily and weekly close above there, have few technical impediments in its path ahead of 1.4245. 

"Further up lies the 1.3712 February 2018 low. Longer term the 2018 peak at 1.4377 is being targeted as well. Minor support sits between the 1.3483 September high and the 1.3479 December 9 high," says Axel Rudolph, a senior technical analyst at Commerzbank in a pre-holiday note. 

Above: Pound-to-Dollar rate shown at weekly intervals with Fibonacci retracements of post-referendum downtrend. 

The Pound-to-Euro exchange rate on the other hand is a different story, as is the performance of Pound Sterling for the 2020 year overall. The Pound-to-Euro exchange rate kept pace with the main Sterling pair GBP/USD Thursday but remained on course for a -6.6% annual decline. 

Many factors have burdened the Pound in 2020 and some more than they have other currencies, notably the coronavirus pandemic, which triggered losses that have since wiped out the limited and little post-referendum recovery that previously been enjoyed by the British currency.

"Optimism has built that the U.K. economy could enjoy a stronger rebound than others in the G7 in 2021, after lagging the field again in 2020. The U.K. has a head-start in rolling out Pfizer's Covid-19 vaccine and it has placed more orders, in proportion to its population, with vaccine developers than all other nations, except Canada. By June, herd immunity should have been attained and all Covid-related restrictions on economic activity probably will have been lifted," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "In addition, the economy's underperformance in 2020 partly was due to households and firms choosing to save a higher proportion of their incomes than in other countries. In theory, then, the economy could go into overdrive in 2021, if households and firms spend these savings." 

Above: Pound-to-Euro rate shown at weekly intervals with Fibonacci retracements of post-referendum downtrend. 

Sterling was still -9% lower against the greenback on Thursday than at its high of the week in June 2016 while the Pound-to-Euro rate was down -15%.

"We do not think Sterling is particularly undervalued, but rather that the depreciation since the Brexit Referendum was necessary to narrow the current account deficit, and we think a deal on these terms is unlikely to catalyse a significant shift in UK portfolio allocations," says Michael Cahill, a G10 currency strategist at Goldman Sachs, who forecasts a GBP/EUR rate of 1.1360 in three-months and a Pound-Dollar rate of 1.42. "We expect that certainty on the Brexit process will bring GBP to the top of investors’ mind as they search for assets that can benefit as business restrictions are lifted." 

The path ahead for the Pound is steeped in uncertainty, comprising both a process of adjustment to new trading conditions with the EU as well as a containment of the coronavirus ahead of any recovery from the pandemic. However, on both of these subjects there's grounds for optimism while earlier 2020 headwinds could turn to tailwinds in the year ahead, with a global rally against the Dollar having left money managers running short of candidates for investment capital in the major currency space. 

Britain's government has moved fast to procure a large stockpile of all major vaccines, leaving the country and economy well positioned for reopening in 2021, which bodes Sterling. Meanwhile, the UK's position as a trade deficit economy implies that if investors are to see 2020's U.S. Dollar decline continue next year in the face of broadening concerns among central bankers about currency strength, Pound Sterling will need to rise if-not outperform after having lagged other major currencies this year and in prior periods.

Above: Pound-to-Dollar rate at monthly intervals with U.S. Dollar Index (blue) and Pound-to-Euro rate (black).