Pound to Australian Dollar Exchange Rate News: GBP/AUD Muted as Brexit Euphoria Fades

December 29, 2020 - Written by John Cameron

STORY LINK Pound to Australian Dollar Exchange Rate News: GBP/AUD Muted as Brexit Euphoria Fades

GBP/AUD Exchange Rate Flat on Lingering Brexit Concerns

Despite relief that the UK and EU finally managed to reach a post-Brexit trade deal last week, the Pound (GBP) is struggling to find support so far this week.

This is in part due to the deal already being priced in, as in spite of the hard-fought negotiations and frequent setbacks, GBP investors seemed optimistic that the UK would not face a no-deal Brexit at the end of 2020.

However, the main reason behind quick fading of euphoria around the deal is that the devil is in the detail, with GBP investors concerned by the exclusion of the vital service sector from the deal.

Given the service sector accounts for roughly 80% of the UK economy, analysts fear this could result in some disruption to the economy at the start of 2021, before a more comprehensive agreement can be reached sometime later in the year.

Economists at Danske Bank, said:

‘As expected, the deal mostly covers goods trading and only to a small extent trading in services (i.e. UK financial services firms lose their passport rights to sell services to the EU market).

‘The agreement means that the EU and the UK avoid a cliff-edge scenario but there will still be significant changes to the trading relationship starting on 1 January, which may create some disturbances in the very near term at the borders.

‘The accompanying joint declarations suggest the EU and the UK will continue discussing financial regulation with the ambition to reach a deal before the end of March 2021.’

However, any immediate downside in the Pound is likely to remain limited, given that the UK has now avoided the risk of even more disruption at the start of 2021.

Australian Dollar (AUD) Exchange Rates Firm amid Risk-On Trade

At the same time, the Australian Dollar (AUD) is holding its ground today as the appeal of the risk-sensitive currency has been bolstered by a positive market mood.

The upbeat sentiment comes in part due to relief over the Brexit deal, but also the welcome news that Donald Trump relented and signed the $900bn US stimulus bill into law.

Trump had previously threatened to veto the bill unless it included large stimulus cheques for families, but appeared to given in over the weekend.

This has capped demand for the US Dollar (USD) today, which in turn is bolstering the appetite for risk-sensitive assets.

However, the Australian Dollar was unable to translate this into any notable gains, amidst thin trading conditions in the post-Christmas lull.

GBP/AUD Exchange Rate Forecast: Lockdown Speculation to Drag on Sterling

Looking ahead, the Pound to Australian Dollar (GBP/AUD) exchange rate faces the prospect of losing ground in the New Year amidst concerns over the UK’s deteriorating coronavirus situation.

UK coronavirus cases have rocketed up over the past couple of weeks as a new, more-infection strain of Covid spread rapidly through the country.

While the government has already imposed stricter restrictions on large parts of the country, there is considerable speculation that the UK government will be forced to impose a second lockdown in early 2021, especially with Christmas celebrations likely to have accelerated the spread of the virus.

Meanwhile, Australia’s renewed push for a ‘robust’ WHO inquiry into the outbreak of the coronavirus could put some pressure on the ‘Aussie’ as it risks drawing the ire of Beijing, which could impose more tariffs on Australian exports to China.

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