Sterling was boosted by the EU/UK trade deal and also posted sharp gains in the year-end session.

Risk appetite overall has held firm amid expectations of a global economic recovery for this year, especially with expectations of further US fiscal support.

Wall Street equities posted fresh record highs at the end of last week with Asian bourses overall making headway on Monday.

The dollar gained some relief on short covering into the year-end session, but overall sentiment remained negative and the US index traded close to 32-month lows.

EUR/USD settled just above 1.2250 after briefly trading above 1.2300 last week.

Sterling was boosted by the EU/UK trade deal and also posted sharp gains in the year-end session with GBP/USD hitting 32-month highs at 1.3700 before a marginal correction.

Commodity currencies posted net gains amid US dollar weakness with AUD/USD at 32-month highs.

Late in 2020, the Euro gained an element of support from agreement on the UK/EU trade deal given with some underlying relief over near-term trade trends.

ECB Council member Rehn stated that officials are monitoring the Euro’s strengthening closely. He reiterated that, although the bank does not target exchange rates, appreciation does have important effects as it leads to a loss of competitiveness and affects the outlook for growth and inflation.

The US registered a sharp increase in the goods trade deficit to $84.8bn for November from $80.4bn the previous month with a monthly surge in imports. Jobless claims declined to 787,000 in the latest reporting week from a revised 806,000 previously which provided an element of relief over near-term labour-market trends.

EUR/USD strengthened to 32-month highs just above 1.2300 as the US currency was subjected to sustained pressure, although there was a sharp correction on the final day of 2020 with a dip to near 1.2220 as the US dollar secured a sharp round of short covering against the single currency.

Overall dollar sentiment remained weak with expectations of negative real interest rates combining with unease over the budget and current account deficits. EUR/USD edged above the 1.2250 level on Monday as the dollar remained close to 32-month lows with markets monitoring new-year flows closely.

The dollar was unable to gain any traction against the Japanese yen as wider selling pressure dominated in the year-end period and USD/JPY dipped to around 103.20.

China’s manufacturing PMI index edged lower to 51.9 for December from 52.1 previously and fractionally below consensus forecasts while the services-sector index moderated to a 3-month low of 55.7 from 56.4 the previous month.

In Congress, the US Senate over-rode a President Trump veto of the Defence Bill, but the Upper House also blocked a move to increase individual financial relief checks to $2,000 from the $600 contained in the fiscal relief package. The short-term political focus will also be on the two Senate run-off elections in Georgia which will be held on January 5th. If the Democrats win both seats, there will be a 50-50 tie which would give the Democrats effective control through the casting vote for Vice-President Harris and potentially strengthen the potential for further fiscal stimulus. If the Republicans win a seat, the party will maintain control of the Senate.

Japan’s PMI manufacturing PMI index was at 50.0 for December, the highest reading since April 2018, although there were also reports that Tokyo would enter a state of emergency later this month due to the coronavirus outbreak. China’s Caixin PMI index retreated to 53.0 for the month from 54.7 previously, although the Chinese yuan continued to advance to trade below 6.50 as the dollar overall remained on the defensive. Overall, USD/JPY dipped to 2-week lows just below 103.00.

After last-minute wrangling over fishing quotas, the UK and EU agreed a trade agreement on December 24th. The EU confirmed that full approval of the deal in the EU parliament was not possible before year-end and there was provisional ratification. The UK parliament voted to approve the deal on December 30th with a substantial majority as the opposition Labour Party voted to back the deal. Sterling had rallied strongly the previous day, limiting the scope for fresh buying.

There was relief that the UK MHRA regulator approved the Astra Zeneca/Oxford vaccine for use. This vaccine is much easier to distribute than the Pfizer version and the UK also has ordered 100 million doses. There were still reservations over logistics issues and also concerns over the near-term outlook. The new variant of coronavirus has increased fears over the need for a further tightening of restrictions which would undermine activity and lead to further upward pressure on the budget deficit.

Sterling initially struggled to make headway given that there had been sharp gains ahead of the final deal being announced. Sterling did, however, post strong gains on the last trading day of 2020 with GBP/USD pushing to 32-month highs around 1.3680 while GBP/EUR rallied sharply to just above 1.1190

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