Sterling declined sharply amid major new coronavirus restrictions.

The dollar stabilised on Friday with markets waiting for fresh developments on a US fiscal stimulus. The US Congress secured approval on a $900bn fiscal support package on Sunday with votes due on Monday.

There was only a limited boost to risk conditions with fresh fears over near-term coronavirus developments amid fears over a further jump in new cases. The dollar secured fresh demand as European currencies retreated and risk appetite was less confident. In this environment, EUR/USD dipped below 1.2200.

Sterling declined sharply amid major new coronavirus restrictions, no Brexit agreement and serious disruption at UK ports with GBP/USD below 1.3350. Commodity currencies retreated amid a firmer US dollar.

The German IFO business climate index strengthened to 92.1 for December from 90.9 the previous month and above consensus forecasts of 90.0. There was a small net improvement for the current conditions and expectations components. The IFO reported favourable conditions in the industrial sector, although services were inevitably less buoyant as coronavirus restrictions continued to be tightened.

The data provided an element of Euro support, although the currency was unable to gains further traction with on-going pressure for a correction following strong gains.

There were no major US dollar developments with EUR/USD settling around 1.2250. CFTC data recorded a decline in long non-commercial Euro positions to 142,000 in the latest week from 156,000, but there will still be scope for position adjustment into the year-end period which could trigger a further decline in long Euro positions.

The Euro dipped lower at the Asian open on disappointment that there had been no progress in Brexit talks and moved lower during Asian trading as the US currency recovered ground, especially with commodity currencies dipping lower. EUR/USD retreated to lows around 1.2180 amid the more fragile trend in risk appetite, although there was still dollar selling interest on rallies with a recovery to near 1.2200 and choppy trading is likely as liquidity starts to decline.

The dollar edged higher in early Europe on Friday, but USD/JPY hit selling interest above 103.50 and drifted lower during the day as wider US support remained limited.

Chinese state media commented that monetary policy would be prudent and more reasonable in 2021, although solid support would continue.

There was no agreement on a fiscal support package during Friday with Congressional leaders set to continued meetings during the weekend.

Late on Sunday, Senate majority leader McConnell stated that deal had been reached on a $900bn stimulus Bill. Final votes in the Senate and House will be held on Monday and will need to be signed by President Trump if it is approved. A one-day roll-over bill was approved to avoid a government shutdown.

The agreement provided an element of relief, but was overshadowed to an important extent by fresh concerns over coronavirus developments as the UK developments increased fears over more severe dislocation to the global economy if the new variant spreads.

There were also reports that two former incumbents Summers and Paulson had called on incoming Treasury Secretary Yellen to back a strong dollar. US equity futures held steady, but the dollar secured an element of defensive support and USD/JPY traded just below 103.50 with EUR/JPY just above 126.0.

The CBI industrial orders index improved to a 10-month high -25 for December from -40 previously and above consensus forecasts of -34, although it was still below the long-term average. Export orders also remained substantially below the long-term average despite a monthly improvement.

Bank of England MPC Vlieghe stated that negative interest rates could help complete the UK recovery. He added that any rate cut would need to be more than 10 basis points to work and that the risks of negative rates being counter-productive were low. In this context, a mix of negative rates and bond purchases would be best.

Brexit negotiations remained deadlocked on Friday despite an element of optimism from the EU side with UK officials again downbeat on the prospects for a deal. GBP/USD hit selling interest above 1.3550 and dipped to test support below 1.3500 while GBP/EUR posted losses to below 1.1000.

CFTC data recorded a switch back to a small net long Sterling position in the latest week, increasing the risk of liquidation if there is no trade deal.

Over the weekend, the government was forced to introduce much tougher coronavirus restrictions in order to combat a new variant of the virus, further undermining the short-term outlook amid further economic damage. With no trade progress, the pound opened sharply lower and continued to retreat as there was major disruption at ports as France closed its border for 48 hours.

Sterling continued to weaken with GBP/USD lows below 1.3350 while GBP/EUR weakened to around 1.1000.

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