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A new coronavirus strain in the UK triggered flight bans and heightened concerns but the pound weakness also partly reflects some disappointment that the EU and UK have again failed to make a breakthrough in Brexit trade talks over the weekend. Economists at MUFG Bank expect the GBP/USD pair to decline to around 1.25 in a no-deal outcome.

See – GBP/USD: New covid strain, a sterling’s nightmare before Christmas – MUFG

Key quotes

“The European Parliament, which has a veto over the whole agreement, has warned it won’t be able to ratify any deal in time for the end of the transition period on 31 December unless it was presented with one by midnight on Sunday. Another self-imposed deadline has come and gone leaving the real hard deadline on 31 December.” 

“The trade talks are set to resume today. We are still hopeful that a last-minute trade deal will be struck to avoid introducing further self-imposed economic disruption on top of the ongoing COVID-19 crisis.” 

“EU officials are reportedly exploring “provisional application” if a deal can be reached by the end of this month and the European Parliament maintains its refusal to vote. Even if a last-minute trade deal is reached upside potential for the pound has now been dampened by recent negative COVID-19 developments in the UK. Cable could now struggle to advance much beyond the 1.3500-level whereas a no-deal outcome would see a return to the mid-1.2000’s.”