Pound Ends Drama-Filled 2020 on High Note Into Brexit New Year

(Bloomberg) -- The pound is poised to end 2020 on a high note as Britain exits its decades-long membership of the European Union trading bloc.

Sterling reached its strongest in more than two-and-a-half years at $1.3686 on Thursday, on track for an annual gain of around 3% against a weakening dollar. Analysts expect the currency, which has served as a market barometer through four years of Brexit political turmoil, to hold its ground around current levels through 2021.

Markets are breathing a sigh of relief after U.K. lawmakers voted through a trade pact with the EU on Wednesday night, after the two sides blew multiple deadlines to finally reach a deal last week. While that shields Britain from a worst-case scenario of a chaotic divorce, the pound is still about 9% weaker since the 2016 Brexit referendum.

“Sterling, and cable in particular, should remain relatively well supported through January,” said Kamal Sharma, director of G-10 foreign-exchange strategy at Bank of America Corp., referring to the pound-dollar pair. “The beginning of the year should lead to optimism about the vaccine rollout into 2021, which will continue to be the big game-changer.”

Risks Remain

That’s not to say that there aren’t serious doubts about the road ahead, as Britain extends lockdowns to contain a surge in coronavirus cases. The currency hit its lowest since 1985 in March on London getting shut down.

The economic outlook remains bleak, with the EU trade pact not extending to services or the financial industry. Investors are also increasingly concerned that Scotland, which voted to remain in the EU in 2016, could seek to leave the U.K.

Still, options markets for the next year show pound sentiment is the least pessimistic since March, and the currency is no longer expected to see the kind of volatility associated with emerging markets.

Aberdeen Standard Investments says sterling could approach $1.40 in the new year before easing off, though it is maintaining a directionless position.

“Momentum will carry us forward in the near term, but risks are rising that fundamentals reassert and the consequences of Covid-19 outweigh the short-term positives of a Brexit deal,” said Luke Hickmore, an asset manager at the firm.

©2020 Bloomberg L.P.