05/01/2021

Sterling edges lower as new lockdown is announced


GBP

Sterling ended the first trading day of the year lower against its peers after the UK signalled a new lockdown to combat the second wave of fast rising coronavirus cases. The pound had initially started the day high, as relief carried over from the last-minute Brexit trade deal that had been announced just before Christmas and signed off by new year’s eve. This optimism helped to initially strengthen the pound and saw it travelled to 2018 highs against the dollar, though much of this can be attributed to dollar weakness rather than pure pound strength.

However this did not last and domestic Covid-19 responses began to swell and cause the pound to sink lower. Analysts cited major fears for the economy as the country was sent back into the most draconian of lockdowns. Also remains uncertainty over the future relationship between Britain and the EU and this further contributes to the downside risks for the pound.

The impact of the more stringent lockdown that was announced by Johnson at 8pm yesterday may also see traders further price in the possibility of an interest rate cut as the Bank of England seeks to support the economy as it enters 2021. If market participants begin to price in negative rates, we are likely to see further short term sterling weakness.

Key announcements

USD- 15:00- ISM Manufacturing PMI (Dec); expected to decrease to 56.6 from previous 57.5


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