Whipsawed by Brexit, pound greets trade deal with a whimper

For nearly half a decade, the pound has been whipsawed by Brexit negotiations – yet news that a trade deal has been reached saw it curb its advance.

Sterling was up 0.3% against the dollar to $1.3533 as of 3:43 p.m. in London, having earlier risen as much as 0.9%. Strategists say much of the optimism is already baked in, with the currency up nearly 10% since the end of June while the relative cost of hedging pound weakness over the next year is at its lowest since March.

The coronavirus and the country’s grim economic outlook have also muscled in on Brexit’s influence, while investors say the limited scope of the agreement – which won’t apply to financial services and the services sector – limits benefits for U.K. assets.

“The reality is that a deal – while good news in isolation, avoiding tariffs etc – does not compensate for trade frictions while the U.K. suffers disproportionately under Covid restrictions due to the importance and significance of the service sector,” said Jeremy Stretch, the head of Group-of-10 currency research at Canadian Imperial Bank of Commerce in London.

The breakthrough caps more than four years of fractious negotiations since the U.K.’s referendum on EU membership, setting up a new era of trade relations between Britain and the bloc. Uncertainty over the future and the expected economic damage from Brexit has held the pound captive below its pre-referendum range.

An accord is “temporarily bullish for sterling, but we think that most of the good news is in the price and suggest taking profit around $1.36,” Sheena Shah, currency strategist at Morgan Stanley, said before the announcement. “The many uncertainties for the pound – local and global – lead us to expect it to be an underperformer for most of 2021.”

Despite the holiday lull, demand for the pound from institutional investors was seen during the Asia session, according to a Europe-based trader who asked not to be identified because he is not authorized to speak publicly.

Manuel Oliveri, a foreign-exchange strategist at Credit Agricole, said participation may be low because many clients have already closed their books for the year.