FX.co ★ Pound optimism fades despite UK-EU sealed deal

The last-minute trade agreement between the EU and Britain swept away investors’ worst fears of a no-deal outcome. As a result, the British pound gained in value. However, market participants expected a more decisive rally, but their hopes for a far stronger pound sterling following Brexit were dashed.

Major investors and the asset managers of most companies decided to get rid of the British currency before it was too late. The sterling rally on the back of the post-Brexit trade deal was short-lived, ending in just a few days. The pound kicked off the new year with losses against its main rivals.

"With sterling having failed to rally materially on the back of the Brexit deal -- versus the euro -- we are now inclined to see it underperform," Mark Dowding, chief investment officer at BlueBay, said. He has been offloading bets on the British pound against the euro since late December.

To make matters worse, Britain has recently entered a third national lockdown. New tougher restrictions are expected to heap further stress on the already weakened economy. Moreover, given that the trade deal does not extend to services or the financial sector, key issues regarding UK prospects as Europe's economic locomotive will remain unresolved for at least several months. This, in turn, will affect business confidence and investor sentiment.

Against this background, the euro looks very attractive in the medium term. It is likely to gain about 5% against the pound sterling and settle at 0.95. Mark Dowding sees the common currency hitting 0.93 over the next month, its highest level since March.