Sterling slumped in early trading, before rallying amid hopes that a UK fishing compromise proposal could break the Brexit deadlock.

Risk appetite dipped sharply in early Europe on Monday amid renewed coronavirus fears, although there was a tentative recovery later in the day.

Pressure for a correction stifled underlying support for equities. Equities rallied from lows as vaccine hopes still had an important underlying impact. A decline in trading volumes contributed to volatile conditions amid year-end pressures.

The dollar spiked higher in Europe, but gradually surrendered gains as underlying sentiment remained negative. EUR/USD traded in a wide range and settling above 1.2200 from 1.2130 lows.

Sterling slumped in early trading, before rallying amid hopes that a UK fishing compromise proposal could break the Brexit deadlock. Commodity currencies also rallied strong from intra-day lows as volatility increased.

There was very choppy trading in early Europe on Monday with high volatility across all asset classes. Risk appetite dipped and the Euro dipped sharply as the dollar rallied and commodity currencies were subjected to a sharp correction. Overall, EUR/USD dipped to lows around 1.2130.

The Chicago Federal Reserve national activity index declined to 0.27 for November from a revised 1.01 previously. There was a slowdown in all four components and the personal consumption index dipped into negative territory for the month.

According to flash data, euro-zone consumer confidence recovered to -13.9 for December from -17.6 the previous month and above consensus forecasts of -16.8.

Data releases had little impact, however, as markets monitored political developments and global risk trends.

Risk appetite stabilised later in the day and the dollar was unable to hold the gains. Commodity currencies secured fresh buying and EUR/USD moved back above 1.2200 with a peak near 1.2250. Underlying dollar sentiment remained weak, but markets remained wary over market positioning and the risk of short covering.

Liquidity will tend to fade over the next few sessions with a significant element of position squaring ahead of the Christmas period and this will increase the risk of further erratic currency moves. Choppy trading continued on Tuesday with EUR/USD retreating to the 1.2215 area amid a fresh setback for commodity currencies.

The dollar maintained a strong tone ahead of Monday’s New York open and USD/JPY strengthened to highs near 103.90. The US currency gradually faded during the day with a USD/JPY retreat back below 103.50 at the European close as the dollar lost ground against major currencies.

Markets continued to monitor the US stimulus developments with congressional voting on the coronavirus support package. The House and Senate both voted in favour and the Bill will go to President Trump for his signature. Markets will also monitor the Georgia Senate elections for early January given the importance for medium-term fiscal policy. Although there was relief that the legislation had been approved, equity markets were unable to make headway, especially with markets also wary over near-term virus developments and the new strain which is liable to spread globally. US equity futures moved lower with the Chinese yuan trading slightly weaker and USD/JPY traded just below the 103.50 level with EUR/JPY holding above 126.0.

Sterling remained under heavy selling pressure in early Europe on Monday with further fears over coronavirus developments and travel bans imposed on the UK. The slide in equity markets was also a key factor undermining support with markets concerned that there will be further damage to the UK economy. GBP/USD declined sharply to 10-day lows below 1.3200 while EUR/GBP strengthened to above 0.9200.

The CBI retail sales index recovered to -3 for December from -25 previously, although this was slightly below consensus forecasts of zero for the month. Retailers were notably more pessimistic over the outlook for January and transport difficulties will be a further negative element.

The UK currency was able to gain some respite later in the day as risk appetite stabilised and there were hopes that UK-French transport would resume.

Sterling moved sharply higher after the European close following reports that Prime Minister Johnson had made a fresh offer on fish in an attempt to break the deadlock. Reports suggested that the UK would offer 66% of catches to the EU compared with the EU offer of 25%. There were also reports that the UK and France have agreed a plan to resume freight operations between the UK and France.

UK third-quarter GDP was revised to 16.0% from 15.5% previously, but the government borrowing requirement was larger than expected and the current account deficit widened. Sterling ticked higher after the data with GBP/USD around 1.3400 and trade developments will remain crucial.

Economic Calendar

Expected Previous
07:00 GBP Total Business Investment (Q/Q) 8.80% -26.50%
07:00 GBP Current Account -11.6B -2.8B
07:00 United Kingdom GDP (Y/Y) -9.60% -21.50%
07:00 United Kingdom GDP (Q/Q) 15.50% -19.80%
07:00 GBP Public Sector Net Borrowing(NOV) 27.30B 20.94B
07:00 German GfK Consumer Confidence (JAN, 2021) -8.8 -6.8
15:00 USD Existing Home Sales Change(NOV) 4.30%
15:00 USD Existing Home Sales(NOV) 6.45M 6.85M

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.