Sterling traded just below its 2020 peak against the US dollar after Brexit negotiators reached a historic UK-EU trade pact.
The pound was up 0.3 per cent to $1.3535 in New York dealings, leaving it close to the 2020 high of $1.3624 struck this month. Britain’s currency also advanced against the euro, gaining 0.4 per cent to €1.1121.
Kit Juckes, strategist at Société Générale, said the Christmas Eve deal resolved one of the major risks hanging over the currency. A no-deal outcome would have been “catastrophic” for the economy, he added.
“The worst case is avoided,” Mr Juckes said. “The next big move sterling will make is up, not down,” with the pound potentially advancing towards $1.40 in coming weeks, he added.
Negotiators reached the economic and security agreement, which guarantees tariff-free trade on most goods and creates a platform for future co-operation on issues such as data sharing, after months of talks that reached a climax this week. The deal comes into force after the end of the Brexit transition period on January 1.
In equities, London’s benchmark FTSE 100 closed up 0.1 per cent, with Lloyds Banking Group leading the pack with a gain of 4 per cent. The FTSE 250, which is more sensitive to the outlook for the economy because of its heavier weighting towards domestic-focused groups, rose 1.2 per cent. The mid-cap index has gained more than 18 per cent during the final three months of the year, leaving it on track for its best quarter since 2009.
Investors felt “an element of relief that one of the main uncertainties for 2021 is clearing”, said Cristina Matti, head of European small and mid-cap equities and country strategies at Amundi. “Investors feel more confident we can get back to our normal job of forecasting companies’ prospects in a more stable environment.”
The brighter outlook also rippled into the UK government debt market, where yields have been suppressed by the prospect of the Bank of England lowering interest rates, possibly into negative territory, to ease no-deal disruption to the nation’s economy and financial markets.
Mr Juckes said the Brexit agreement means the odds of the BoE pushing rates into negative territory had declined markedly. Markets have largely priced out negative rates being implemented over the next year, according to trading in the overnight index swap market.
As it became clear a deal was imminent on Wednesday afternoon, the yield on the 10-year gilt, which moves inversely to the price of the securities, rose by a tenth of a percentage point to 0.29 per cent, in its biggest increase since March. On Thursday, the yield slipped lower to 0.25 per cent.
Oliver Blackbourn, portfolio manager at Janus Henderson, cautioned, however, that “it is important to remember that this is a narrow deal on trade, focused on goods sectors that make up a much smaller proportion of the UK’s economy than services”.
“While the impact is likely to be masked by the hoped-for recovery from the pandemic in 2021, many companies will still be impacted by the changing terms of trade,” he said.
The UK’s departure from the EU has been the defining theme for the currency since the referendum of June 2016.
In the immediate run-up to the announcement that UK voters had opted to leave the bloc, the pound was trading at about $1.50 against the dollar.
The currency staged one of its most violent falls on record in the aftermath of the referendum result, tumbling to just over $1.32. A scorching rally in the dollar during the market tumult of March 2020 sent the pound spiralling to about $1.14, but generally sterling has oscillated around $1.30 since the Brexit vote, jolted higher and lower by the vagaries of the trade talks.