Covid, the Grinch who stole Christmas

21 Dec 2020
Positive stimulus news out of the US overwhelmed by jittery Traders over the worsening virus situation. GBPUSD under pressure from new lockdowns and lack of clarity over Brexit. Global equity indices put on sale.

Despite positive news emanating out of Washington about agreement over a $900bn stimulus package, risk-on sentiment has been sucked out of the market with the worsening virus situation. Deutsche Bank carried out a survey recently and the 3 top risks that investors feared was: 1) a mutation which dodges the vaccine 2) serious side effects from the vaccine begin to emerge 3) enough people refuse to take the vaccine slowing the return to normality. Another potential problem could be effective delivery of the vaccine, is the logistical capacity there? Clearly, the virus is still a key factor driving the risk-on/off switch in investors’ minds.

The GBPUSD has been hit particularly hard and is 1.54% down as a result of the strict Tier 4 restrictions announced for London and South East England on Saturday. Additionally, other nations have taken preventative action by closing borders with the UK in an attempt to quell the spread of the new mutation. Sadly, in my opinion this will most likely be futile as the new mutation will already be circulating throughout Europe. Brexit talks have pushed through another deadline with UK Government sources stating talks remain difficult and significant differences remain – no surprises there. Oddschecker and Smarkets have it at almost 50/50 for deal or no deal. Implied vols have increased and risk reversals have decreased further indicating some risk premium being priced into GBPUSD. In terms of the BoE implementing negative interest rates, ultimately it depends on how Brexit resolves. However, even in a no-deal scenario I still believe it won’t happen. The major UK commercial banks have pushed back against it and its efficacy is non-existent as the likes of Japan, Europe and Switzerland have shown. If it was to occur GBPUSD would come under pressure as it gets branded with the title of funding currency.


GBPUSD price action is starting to tightly squeeze between the apex of the ascending triangle pattern. Today the price candle came right down and tagged the 50-day SMA (orange line) and the white uptrend line and has had a slight bounce keeping the uptrend intact. The RSI has turned down swiftly and is sitting around the 45 level and important level of support going back to October. Brexit will drive the breakout direction of GBPUSD.

The latest positioning data from the CFTC showed traders opting to lessen their positions in safe-haven currencies ahead of year-end. The main beneficiaries of this were the more cyclical currencies like CAD, RUB, AUD, NZD and BRL. However, if today’s sell-off persists we could see JPY, CHF and the Dollar (still very short net positioning) attract some flows. The Norwegian Krone has been hit hard by a double whammy of risk-off flows and a substantial fall in Brent Crude. Sticking with commodities, Gold is providing little respite as a hedge and is hovering nervously around its 50-day SMA.

Losses of more than 2.5% on UK benchmark indexes were led by large tumbles at UK banks’ Lloyds and Barclays. Moving across the pond, on a sectoral basis Energy, Health care and Materials have been hit hardest. In other news the Fed over the weekend authorized Wall Street banks to resume stock buybacks. JPMorgan immediately announced $30 billion of share repurchases. Traders may be wondering what sort of signal this sends. The Fed wouldn’t do this unless they had a more positive outlook on economic conditions – could rates tighten on a faster timeline than what the market currently expects?

Ready to trade?

It's quick and easy to get started. Apply in minutes with our simple application process.

The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients.

Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.