Sterling fell against the US dollar following global stock markets’ plunge. The fall was driven by a sell-off in Chinese shares, which dampened risk sentiment and led to increased trading of the US dollar ahead of a US Federal Reserve policy meeting.

Risk-averse market sentiment

As we have seen recently, the pound is sensitive to how global markets are fairing as well as how the pandemic is progressing. According to some analysts, the pound could find support if cases continue to fall, especially since data on Monday showed that new Covid-19 cases in Britain had fell for five consecutive days. Market analysts have suggested that the pound’s fall was mainly driven by nervous and risk-averse market sentiment due to the sell-off of Chinese tech stocks. Risk trades have been hit as a result and so has the pound.

For investors, a lot will depend on the two bank meetings coming up: the two-day Fed meeting later on Tuesday, and the Bank of England meeting next week. The BoE’s interest-rate setter Gertjan Vlieghe while speaking in an event explained that the the central bank should not cut back its stimulus before 2022, as the recent rise in inflation is temporary while Covid-19 poses a significant risk to growth.

Covid-19 declines offer a boost

Earlier on Tuesday, the pound got a boost after the number of new positive cases fell significantly. Investors will expect to see more statistics about the numbers of cases and deaths before they can make informed decisions.

The recent rising cases had an impact on economic data which showed that the economy was growing at a slow pace as businesses complained about the rising cases and employees self-isolating after coming in close contact with someone who had been tested positive. The ongoing pandemic and the risks posed by it have confirmed that it is perhaps too soon for the Bank of England to raise interest rates, as it needs to continue its financial support rather than tighten its programme. The rise of the Delta variant of Covid-19 combined means that the bank needs to continue offering support to the economy.  

If Covid cases continue to fall then the pound could find support. The UK has also acted as a test case, and it remains to be seen whether its decision to reopen its economy has been the right one. Nonetheless, analysts argue that data has shown that the UK economy does not depend on the virus and that vaccines are working. If the country does succeed to beat the Delta variant, without its economy being massively affected with further restrictions, then their example could be followed by other economies. This could further help the pound which is influenced by global sentiment.

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The improved global market sentiment and the slowing of Covid-19 case rates has helped the pound to recover, but Brexit anxieties could pose a potential threat to the currency.

Covid-19 and the NHS app

This week alone 96 deaths have been reported, the highest number since March. While on 1 June there were 0 coronavirus deaths, 1,114 deaths have been reported since then with 73 deaths being reported on Wednesday (21 July). The vaccination programme has not managed to break the link between infections and fatalities, with the total number of deaths from the pandemic reaching 128,896. However, new cases have not risen considerably, as the number of new cases that were reported on Wednesday was 44,104, slightly higher than the previous week’s 42,302. As it stands, 46,388,744 people have been vaccinated at least with the first shot in the UK. According to statistics, around 39,035 people had their first jab on Tuesday, while 161,279 people had their second shot yesterday, with 36,404,566 people now being fully inoculated.

With the ongoing self-isolation of workers due to coming into close contact with a positive coronavirus case, businesses have been affected, while the government has expressed its apologies for the inconvenience. Director of food and sustainability at the British Retail Consortium Andrew Opie told The Times that the "pingdemic” has put pressure on retailers who found it difficult to keep stores open and shelves stocked, demanded that the government needed to act fast.

Boris Johnson, speaking at the last PMQs before the summer recess, said "everybody understands the inconvenience of being pinged". The prime minister himself had to isolate after coming into contact with Covid-positive Health Secretary Sajid Javid last week.

Labour leader Sir Keir Starmer accused the prime minister of the mixed messages regarding the NHS Covid-19 app and said: "When it comes to creating confusion, the prime minister is a super-spreader.” Starmer had to isolate himself following one of his children being tested positive.

According to the figures from the ONS, around 9 in 10 adults in all parts of the UK could possibly have Covid-19 antibodies with the estimates ranging from 88.6% in Scotland to 92.6% in Wales, 90.0% for Northern Ireland and 91.9% for England.

Brexit and Covid-19: How will the pound fair?

It simply depends on improved market sentiment and the management of the Covid-19 Delta variant. The near-term outlook for Sterling will be determined by concerns regarding the Delta variant and whether investors have fully priced in the news.  If they have done so, then possibly the currency and market sentiment will improve. 

Brexit remains a threat to the currency too, as the UK and EU could find themselves at the opposite end of the table over the Northern Ireland question. On Wednesday, the UK announced its intention to renegotiate certain points included in the Northern Ireland protocol, and argued that in its current form it will create problems for trading goods between Great Britain and Northern Ireland. The release of the command paper outlining the UK government proposals about how the Protocol should be changed poses a major challenge to the EU.  This move could potentially hurt the pound, according to analysts. However, they believe that this could become a more serious concern as we move closer to 1 October with potential legal battles and EU threatening the UK with the imposition of trade sanctions.

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Sterling experienced some volatility after reaching a fresh three-year high against the US dollar due to expectations for an economic recovery and positive house price data. Some analysts have attributed the surge in the pound to positive global investor sentiment about the UK economic recovery, while others pinned the pound’s gains on a retreat in the US dollar.

US dollar weakness & BoE interest rates

According to strategists at Toronto-Dominion Bank, “The whole ‘U.K. vaccine’ story is a little tired.” It’s probably less about the U.K. and more about the USD, which has been drifting lower overall.”

Beyond the prospect of unlocking the economy, the pound found support from expectations that the Bank of England will soon signal that it may start to raise interest rates next year. The UK’s economic recovery and the potential of the Bank of England ending asset purchases and hiking are encouraging traders to buy the pound.

Concerns about the new variant

However, Sterling has also been influenced by concerns over a new coronavirus strain which pushed the currency lower. The new Indian variant along with concerns about reopening the economy on 21st of June have dented some of the pound’s recent gains. The new strain appears to be more transmissible than previous ones. While the variant did not appear initially to pose a big threat, growing concerns from the government as to whether the UK will fully reopen the economy or there will be delays, have hurt the pound.

The Indian variant is spreading across the UK and the latest statistics suggest Covid-19 cases are starting to rise sharply. The strain is mostly found in England. The government is waiting for more data before it decides to relax restrictions. Politics will also play a role, especially after the criticism the government has faced regarding its handling of the pandemic. Boris Johnson’s government is under political pressure following testimony to MPs by Prime Minister Boris Johnson's former senior adviser Dominic Cummings. This might drive the government to adopt a more cautious approach to June 21.

Any delay will be seen by traders and markets as negative for the pound in the short-term as it could hurt business and consumer confidence while postponing the ability of the economy to recover fully. The fact that such concerns about the economy have also coincided with increasing public scrutiny of the government’s response to the Covid-19 pandemic, they could potentially drive the pound lower against both the US dollar and the euro.  

For this week then, the main drivers for the pound will be any signs showing that the government intends to fully lift Covid-19 restrictions on 21 June and any data regarding the impact of the Covid-19 “Indian variant”.

 

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Sterling rose for a second week against the dollar on Friday, supported by a hawkish Bank of England and a successful vaccination program which has enabled the gradual reopening of businesses.

The Bank has begun tapering asset purchases, while the country is restructuring its vaccine rollout program to help protect more quickly those in areas where a specific variant of the coronavirus, first detected in India, has emerged. The UK has been among the top countries with the fastest vaccination in the world, giving a first shot to almost 70% of the adult population and a second one to 36%, helping to reduce infection rates and deaths.

Near-term gains

The British Pound will likely remain supported against the euro and dollar over the coming weeks according to foreign exchange analysts. The fast vaccine rollout has allowed a sharp economic rebound which has been unprecedented. The positive sentiment around the vaccine rollout is expected to offer further near-term support, analysts have noted. NatWest analysts have said that "While the pace of rollout has been a factor, it’s the UK economy’s underlying sensitivity to the vaccine that has been the most important aspect," they add. "The UK has suffered the greatest hit to GDP of the developed economies during the pandemic and therefore has the most to benefit from the easing of restrictions." The positive vaccine story has already been priced in the current level of the pound and as such analysts do not expect many more gains. The vaccine programme and the latest Scottish elections which have eased anxieties about a second Scottish independence referendum, offered support to the pound, but further gains might be limited.

Upside potential for the pound?

With expectations of a third major unlocking on Monday 17th of May and a final unlocking on 21st of June, analysts see further upside potential for the pound. The recent gains are partly due to the Bank of England's policy meeting on the 6th of May where it was announced that the Bank will be reducing the scale of weekly quantitative easing purchases and raise economic forecasts. As the global economic recovery gathers momentum, strategists at UBS Wealth Management also expect the pound to advance further.

The Bank of England expects the UK economy to return to pre-pandemic levels before the end of 2021. However, NatWest analysts have warned that there are significant risks as we move ahead: “Brexit is weighing on trend growth. Softer productivity trends, deep economic scarring and a deteriorating sustainable current account deficit position are expected to impact negatively.”

Danske Bank has also said that they retain a bullish stance, but they believe there "is no obvious trigger for another sharp move" higher in GBP/EUR near-term. Strategists at Rabobank have also said this week that further advances will be rare, with a new 2021 high possible by year-end. Senior FX Strategist at Rabobank, Jane Foley said: "we continue to expect only a slow drift lower for EUR/GBP.

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With market sentiment strong as the economy is recovering and more people are vaccinated, economists will be looking with great expectations at today’s Bank of England interest rate decision. Despite the current optimism, the bank is not expected to raise interest rates from their current record low of 0.1%.

Will the bank raise its growth forecasts?

The economy has improved: the private sector has experienced fast growth, mortgage lending is at a record, and economists are forecasting that UK GDP will rise at its highest since the 1940s. The FTSE 100 share index hit its highest level in over a year yesterday, with banks, mining and oil companies benefiting from the global economic rebound.

Britain’s services sector has also posted its fastest growth in more than seven years, as the latest Service PMI jumped to 61.0 for April. Companies saw sharp increases in business and consumer spending, new projects and new orders rose at their fastest rate since December 2013. Service providers noted that the easing of Covid-19 restrictions across the UK has helped businesses and growth. Firms also employed more staff and employment growth accelerated to its fastest since October 2015.

Since the economy is doing so well, the BoE is expected to raise its growth forecasts today, in its latest Monetary Policy Report which will also be released on Thursday. Elsa Lignos of RBC has noted that the Bank will predict a smaller increase in unemployment this year: “Significantly, the extension of the government’s furlough scheme, which was announced at the budget, is likely to see the MPC lower its estimate of where it expects unemployment to peak once support is withdraw.”

Will the bank slow its stimulus programme?

At the same time, the Monetary Policy Committee will be considering when to slow its £895bn asset purchase stimulus programme, which is buying up around £4.4bn of government bonds each week. If there are any strong signals that it may do so, then the pound could rise.

Shamik Dhar, chief economist at BNY Mellon Investment Management, said that the “economy looks set to bounce back strongly in the second half, probably at double digit annualized growth rates, returning overall activity to pre-crisis levels this year. Inflationary pressures might build, but will probably be contained by a strong supply response in those industries that have been locked down. The Bank of England (BoE) remains a long way off tightening monetary policy, but could be one of the first central banks to signal it’s thinking about it, possibly in early 2022.” Despite the bright outlook, the economy will not return to pre-Covid levels. He added:

“The economy will return to pre-crisis levels of economic activity quickly, and possibly recover the pre-crisis trend level next year. But the composition of the UK economy has probably changed permanently thanks to the pandemic. While we will see a strong bounce back in ‘close contact’ industries, such as hospitality and travel, this year and next, they may never recover their pre-crisis share of the economy. ‘Remotely-consumed’ goods and services will remain a larger proportion of the economy than they were pre-pandemic.”

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Concerns about the Covid-19 pandemic are weighing on the markets and have impacted on global investor sentiment again, amid a surge in coronavirus cases in countries such as India and Japan. This has also pushed the value of Pound Sterling against the Euro and Dollar lower, confirming that global market sentiment will need to improve to boost the pound.

Yesterday, European markets also experienced their biggest fall this year, with airlines and hospitality firms severely affected. The pan-European Stoxx 600 lost 1.9% and the London FTSE 100 lost 2%.

The release of ONS data on Wednesday morning has done little to change things. UK consumer price index (CPI) data showed that the inflation rate rose to 0.7% in March 2021 from 0.4% in February. This is the first increase from fuel prices since February 2020 which helped drive the increase in March. UK CPI inflation rose by 0.3% m/m. However, in the long-term, increases in several of the producer price index (PPI) numbers signal potentially more inflation in the future which will be positive for GBP, as this will drive the Bank of England to tighten UK monetary policy.

Weaker pound

The pound is generally affected by global market sentiment and it traditionally benefits when the global economy is growing, and investor sentiment is positive. This is why declines in the stock market are reflected by similar declines in the pound. While positive economic releases can have a beneficial effect on the pound, the global conditions can overshadow such domestic data.

The pandemic has had a massive impact on the pound’s travails, and this is also what is happening right now as risk appetite has been under pressure with the number of Covid-19 infections rising in Asia. The WHO said that the number of cases has surged in all regions except Europe. In Japan, Tokyo and Osaka have asked the government to declare a state of emergency from 29th of April 29 to 9th of May 9.

FX analysts at Bank of America have said that “a pro-cyclical, risk-on environment should be GBP supportive as it will for other high beta currencies. What will see GBP standout is whether the UK can continue to attract investment inflows, which have been a hallmark of the recent appreciation."

UK Inflation Data

The release of inflation data has not influenced the pound, as investors are waiting to see how the country manages to move back to normality. Investors will be more interested in Friday’s release of PMI data for April, as it will offer a clear picture of how strong the rebound has been after reopening businesses on the 12th of April.

Wednesday’s release of inflation numbers showed that the annual CPI inflation rate has gone from 0.4% in February to 0.7% in March according to the ONS, and it was driven by a 0.3% month-on-month rise recorded in March.

"The UK has reached a turning point in its economic reaction to the pandemic where price growth is now on an upward trajectory, and should remain so for some time to come. Year-on-year consumer price growth slowed to 0.4% in February from 0.7% in January, primarily due to falling prices in clothing and footwear," Paul Craig, portfolio manager at Quilter Investors said. He added: "From here, inflation may tick markedly higher if the steady drip of consumer spending morphs into a waterfall as lockdown restrictions are lifted and households spend some of their accumulated pandemic savings.”

The UK will need a bit more time to recover and the economy to become more normalised until the Bank of England will consider raising interest rates. The Bank of England has stressed that the economy will need to reach pre-pandemic levels and the inflation target to be met, before it makes any move.

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Sterling strengthened as a result of a combination of factors including the reopening of businesses in April which helped support the pound at the start of the new week. April has been a typically good month for the pound with gains historically occurring in the second half of the month, and this could also be partly the reason. Foreign exchange strategists believe that this could be enough for the pound to continue trading well against the euro, especially with many economic data due to be released this week.

Economists and traders are expecting that this week’s economic releases will be proof that the UK economy is recovering as businesses reopen and the quick vaccination programme continues. With inflation coming out on Wednesday and the PMI survey for April out on Friday, markets are optimistic that the data will support the view that the UK is on track for a quick economic rebound. The PMIs are expected to show that economic activity is increasing as restrictions have been eased.

UK economic rebound

The pound has experienced a solid year, as investors speculated on a quick economic recovery due to growing confidence in the vaccine rollout programme. The UK economic outlook has improved the past few months as the successful vaccination programme supported a strong Sterling. Financial analysts and investors forecast that the UK economy will recover as more people are able to go out and spend money in retail shops. Already, there is an increase in shopping following the three-month lockdown, when on 12th of April non-essential stores reopened.

UK businesses report better than expected sales

With many UK businesses reopening, trading has increased as consumer demand was higher, and the reopening proved to be a success confirming that a strong rebound in the second quarter is possible. The ability of consumers to spend was also due to the government’s important furlough scheme which protected consumer income. From bank transactions to restaurant bookings and shop visits, it was evident that people were eager to spend when businesses reopened on 12th of April. Already, the first three days after the reopening, visits to retail and other shops increased instantly, pointing to a sharper recovery than initially expected.  

Consultancy Springboard’s statistics showed that footfall last week across all UK retail shops was 25 per cent lower than in the same week of 2019. However, the gap narrowed by more than half in a single week, reaching the level of trading after two months following the first lockdown. Retail parks was the major driver behind the surge, which was only 2 per cent down when compared with the 2019 level. Diane Wehrle, insights director at Springboard, described the first week of reopening as “an outstanding performance” for the UK retail sector and that with the reopening of indoor hospitality on 17th of May 17, “a further boost” to retail destinations is also to be expected.

Fable Data statistics also showed that spending in pubs and restaurants recovered to 42 per cent and reflected similar numbers in restaurant bookings tracked by Open Table. Government figures on public transport also showed that people were on the move, while vacancies also increased to pre-pandemic levels in April. Such measures showing people’s mobility, shopping and restaurant bookings are increasingly considered crucial indicators of the health of the economy and much more accurate when compared to official economic numbers. These near-real-time indicators reflect a more accurate picture of the economy as economists are hopeful that everything is going as well as could have been hoped.

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The British pound fell against the euro and US dollar, after the remarkable recovery it enjoyed during the first three months of the year. With the euphoria about the UK’s successful vaccination programme starting to wear off and a wider demand for the euro, the Sterling outlook is not looking as promising.

The pound performed very well against the euro in the opening quarter of 2021, but since February’s highs, it has dropped, suggesting that the Eurozone is performing comparatively better as the European coronavirus vaccination rates have increased. For many economists, further gains for the pound might prove to be difficult as most of the good news has already been priced in.

Bright Outlook for the Pound might be threatened

The UK economy managed to recover after a difficult 2020, as economists grew optimistic after the successful and rapid vaccine rollouts and the easing of the lockdown restrictions. The economy is expected to expand 5% this year, something that has boosted the pound the first quarter. The reopening of the economy has been now priced in, while the sell-off in UK government bonds, pushed yields higher and supported the pound. However, economists are questioning about how much higher the pound could possibly go. Foreign exchange analysts are warning that the UK is in a more difficult position than other economies due to the fact it was severely affected by the Covid-19 crisis earlier on, despite economic momentum accelerating. Additionally, there are worries about the potential impact of Brexit, with exports and imports with the EU having fallen dramatically in January.

The pound will find support if the UK manages to continue attracting investments such as cross-border mergers and acquisitions which are a significant part of the conditions required for continued growth.

Pound sensitive to BoE Andy Haldane’s departure

News that the Bank of England Chief Economist Andy Haldane would be leaving the Bank's Monetary Policy Committee has also affected the pound. One of the reasons was that Haldane was a hawk on the MPC, supporting higher interest rates and being optimistic about the UK economy. A hawkish central bank is linked to a solid and strong currency, and as such his departure was interpreted as a crucial factor in the pound’s weakness. His views on the economy were seen as vital for boosting the pound in February.

With Haldane leaving, the MPC may now react to any forthcoming inflation risks a little later, but markets will need to wait and see who the new chief economist will be and reassess the new policy changes. For other economists, Haldane’s departure might not have a long-lasting effect on Sterling as there weren’t any plans of tightening the BoE policy in the coming months anyway.

The recent declines of the pound might also be short-lived as some economists expect the pound to continue its outperformance, particularly against the Euro.

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With a lot less Brexit uncertainty and projected gains by 2022, the UK economy and the pound are expected to recover. In the short term, and due to lockdown measures, the pound will be weighed down by negative sentiment which will also lead to economic contraction. But economists are positive that following the rollout of vaccines there will be a sharp recovery in economic activity and investor sentiment which could see Sterling rising against major currencies such as the euro and dollar.  

The recent lockdown restrictions to control the spread of a new strain of the coronavirus will slow down the economy and hurt the pound, but a swing in sentiment might also be materialising soon as the market has reached its negativity point against the pound. Kit Juckes, Macro Strategist at Société Générale, has said that things will improve with the new vaccines and positive news about controlling the virus: "If the new lockdown does work, and more so if vaccine deployment does go quickly from here inwards, Sterling could have a good year. In the meantime, it seems clear that a lot of gloom is priced in already.”

England is currently under a strict national lockdown as the government struggles to rein in the rise in infection. On Wednesday, the UK recorded its greatest daily surge in coronavirus-related deaths since 21 April, with a total of 1,041 registered deaths.

Short-term forecasts for the pound

In the first quarter, the UK economy could contract due to further lockdown measures which will slowdown economic recovery. A rebound in economic activity, however, is expected immediately after the lockdown measures are lifted. With more vaccinations, as a 2 million weekly target is set to be successfully completed by the end of January, economists are hopeful that the economy will slowly bounce back. The government has obtained access to 100 million dosages of the Oxford-AstraZeneca vaccine, with tens of millions of vials to be delivered once the MHRA has quality checked them. There are more than 730 vaccination sites across the UK, and more are opening this week to provide access to Covid-19 vaccines to a wider group of people at risk. In this respect, as vaccinations increase, so will market sentiment towards the pound.

"We expect a gradual re-opening from early March onwards, with faster progress of normalisation thereafter as more people are vaccinated and springtime heralds the natural remission of seasonal respiratory viruses,” Kallum Pickering of Berenberg said. Analysts at Berenberg highlighted that the near-term outlook will be “much worse than before” and forecasted a 2% decline in the first quarter of the current year estimated growth of 6% for the whole of 2021. Kallum Pickering said that the forecast for the first quarter might be gloomy, but the second quarter will see “faster catch-up growth” of 9% and the third quarter is forecast to see 4.5% growth than the 2.3% previously.

Growth rebound in the Second Quarter

According to Pickering, the growth rebound in the second quarter of 2021 will be greater than originally estimated with +9% expected, against the 6% growth forecast previously. For the fourth quarter he sees 1.3% forecast versus 0.9% previously. Pickering said: “we now project an 11.5% decline in 2020 followed by gains of 6.0% in 2021 and a 6.5% gain in 2022 (previously -11.6%, 7.3% and 4.9%, respectively). Despite the near-term hit, the UK medium-term outlook remains positive. With much less Brexit uncertainty and strong gains in global demand ahead, UK real GDP can still recover to its pre-pandemic level by the end of 2022 as previously expected.”

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The pound appears to have risen ahead of the weekend, as Brexit negotiations continue. EU ambassadors have been told that a trade and security agreement with Britain is almost ready to be finalised as gaps on the contentious issues are “slowly shrinking.”

Both sides however remain inflexible, with European politicians saying that there remains work to be done and the UK saying that the EU needs to compromise. The risk of a no-deal Brexit in six weeks is still high.

According to a Bloomberg article, the UK “hasn’t moved sufficiently to overcome the main obstacles to a post-Brexit trade deal as three of the bloc’s leaders called for contingency plans to be stepped up in case there is no agreement.” Secretary General of the Commission Ilze Juhansone told envoys from the EU’s 27 member states on Friday that “negotiations could now slip into December as progress has been slow.”

On the other hand, the report noted that "The U.K. government has said that both sides have already made concessions on the three remaining areas of disagreement - access to British fishing waters, the level playing field for business, and how any deal is enforced - but that it’s up to the EU to make the final compromises."

A report on Reuters, stated that EU diplomats reported that “The European Union and Britain remain at odds in last-ditch trade talks over fishing rights, guarantees of fair competition and ways to solve future disputes, even though they are very close to agreement on other issues.” A senior EU diplomat told Reuters that “We are both close and far away. It seems that we are very close to agreement on most issues but differences on the three contentious issues persist.” Officials will continue negotiations online, as on Thursday it was announced that direct talks were suspended after a member of the EU team tested positive for COVID-19.

Negotiations are stuck

Negotiations have not progressed much as both sides remain unyielding on the main points: “Some things on the level playing field have moved, albeit very, very slowly. Fisheries are not really moving anywhere right now.” In terms of state aid, Britain has offered to set up a regulator for corporate subsidies, as the EU requested, but this was rejected as the body needed to be independent from the government and with a clear authority. Another EU official said that “negotiators mostly focused on such elements of corporate fair play as well as divvying up fishing quotas in recent days: ‘Both of these are still very stuck.’”

Pound Rises despite Brexit deadlock

The pound has risen against the Euro, Dollar and other major currencies, as negotiations continue. Markets remain confident that both sides will strike a deal despite the persistence of major differences. In the possibility of a trade agreement being reached the next two to three weeks, the EUR is expected to fall, something that will also be supported by positive news about a vaccine for Covid-19.

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