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Is this the last we'll hear of Brexit?


30 December 2020

The UK Parliament is set to approve the historic Brexit trade deal at 2:30PM UK time today, which nullifies the threat of the UK crashing out of the European Union without a deal. While the agreement signaled relief to the markets, this may not be the last time we’ll hear about potential Brexit-induced chaos.

It’s important to note that the deal in hand, which was struck on Christmas eve, includes a “review” clause. That means that if either the UK or the EU is unhappy with how this new arrangement is working out (or not), they could renegotiate the part of the deal that’s being disputed.

This also suggests that tariffs could yet be imposed on UK-EU trade further down the line. The accord that’s set to go into effect by this Friday also lacks clarity on key issues, such as financial services, data flows, and even control over Gibraltar. This sets us up for potentially more confrontational discussions between London and Brussels, as both try and navigate life in the post-Brexit era.

UK markets join the global party


Such potentially disruptive risks further down the line didn’t stop UK equities from offering a positive reaction on its first trading day since the post-Brexit trade deal was struck on Christmas Eve. Yesterday, the FTSE 100 climbed by 1.55 percent, which was its largest single-day advance in four weeks. Still, the UK benchmark stock index remains nearly 14 percent lower from its 2020 high. At the time of writing, FTSE 100 futures are relatively steady.

Meanwhile, the Pound is firmly within its uptrend against the US Dollar since September, with GBPUSD on course to post a new two-year high above the 1.36 line.

However, Sterling is having less success against the Euro in the post-Christmas sessions, with the former unwinding recent gains against the shared currency. Still, EURGBP remains in a sideways tranche that the pair has adhered to since June.

Dollar declines set to continue next year


Considering the Pound’s 11.9 percent weightage on the Dollar index (DXY), more clarity on the UK outlook could heap more downward pressure on the DXY. Although the DXY's 14-day relative strength index is flirting with oversold territory once more, any near-term pullback isn’t likely to change the Greenback’s downward trajectory.

And with speculative traders ramping up their bearish bets against the Dollar to the highest levels since March 2011, according to data from the Commodity Futures Trading Commission, the DXY appears destined to extend this year’s near-7 percent decline into 2021 as well.

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