Brexit deal reached before Christmas, setting a new tone on GBP; as 2021 approaches, trends on the currency market is also likely to shift

•  Brexit deal finally reached before Christmas, pushing GBP higher
• USD may rebound against EUR as the Fed and ECB’s policies diverge
• Vaccine and Biden’s presidency may halt upbeat momentum on emerging market currencies such as Chinese Yuan

The EU and the UK have finally and officially reached the Brexit agreement last Thursday, just before Christmas. The agreement, although preliminary, effectively prevents the no-deal situation and also greatly boosted GBPUSD to break through 1.36. Despite the weakness in the following days, as of today, the record on December 24th still remains as the 7-day high. The agreement is the result of 4 years of culmination, when UK citizens voted yes in the referendum to leave the EU in 2016. UK Prime Minister Boris Johnson noted the deal as covering £688 billion in trade per year, coming with “Canada-style” free trade with no tariffs or quotas imposed on UK goods exported to the EU market. He also firmly stated that, UK is once again an independent entity with full control of its waters, although most fishermen were still not satisfied with the deal as EU member states still have at least 5 years of partial access to the fishing resources.

As for the USD, some analysts believe that it will likely have a rebound specifically against EUR. USD soared at the onset of the COVID as investors panicked and scrambled for this safe-haven currency. It then quickly turned lower as the Fed deployed massive stimulus at an unprecedented rate. As credit spreads narrowed and market sentiment recovered, USD has also been significantly weakened. However, the trend may change in 2021 following the economic recovery and vaccine distribution. As the Fed shifts away from the dovish stance, central bank may consider pulling back stimulus faster than previous thought. On the other hand, ECB insisted on aggressive easing measures such as negative interest rates. This gap between USD and EUR suggests that, EUR may turn even lower as USD rebounds against it.

Among the emerging market currencies, Chinese Yuan has strengthened over 7% against USD over the past year, making it the best performing Asian currency in 2020. It has been primarily driven by the USD weakness as well as the rapid recovery of the Chinese economy. With 4.9% growth rate in Q3, China outgrows global peers. In 2021, as vaccines being deployed and Biden begins his presidency, the narrative may change as USD and other developed market currencies rebound. The US-China tensions, especially over tech firms, intellectual properties, and trade may further threaten Yuan’s rally.