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British Pound On Front Foot Against Euro and Dollar as Second Best Performer of 2019

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- GBP on front foot against EUR and USD into year-end.

- GBP the second best performing major currency of 2019.

- After rollercoaster year sees it rise against all except CAD.

- Year-end price action dominated by international factors.

- Brexit negotiations front and centre for GBP in year ahead.

The Pound was on its front foot in the final session of 2019 Tuesday and is on course to see out the year as the second best performing major currency, although international factors were driving price action ahead of year-end while the Brexit negotiations are expected to take centre stage in 2020. 

Pound Sterling was higher against the Euro and Dollar early in the Tuesday session, setting the British currency up for its sixth consecutive gain over the greenback while keeping the gentle uptrend in the Pound-to-Euro rate intact.

The Pound is the second best performing major currency at the end of what has been a rollercoaster year for the British unit and markets at large. Like many a recent year, Sterling entered 2019 on its front foot, quickly advancing by 6.5% against the Euro and 4.9% against the Dollar in the first quarter only to be hit by steep losses in the second and third quarters that saw it fall by around 10% against both rivals by the beginning of September. 

"The bare UK data calendar until Dec manufacturing PMI data on Thu will keep cable susceptible to the market’s mood music. The GBP is unlikely to decouple from its current trading range until more clarity is achieved on the trade front," says Shaun Osborne, chief FX strategist at Scotiabank. "GBP upside may be limited to around the 1.3150 mark near where the currency traded prior to its mid-Dec surge. Resistance is at 1.3175 while support sits at 1.3066."

Above: Pound-to-Dollar rate shown at daily intervals.

Sterling is on course to end 2019 with a 5.36% gain over the Euro and a 3.09% increase on the Dollar after rising double-digit percentages since the dark days of early September, when fears over a 'no deal' Brexit under then-newly minted Prime Minister Boris Johnson reached a fever pitch. 

However, price action was influenced more by international factors than the domestic in the final days of the year, with broad-based weakness in the U.S. Dollar the most notable driver of moves.

The Dollar has ceded ground to all its major rivals after suffering punishing losses throughout the last week, which have enabled Sterling to rise against all of its major counterparts, in part due to the scale of earlier losses that wracked up between the December election and Christmas holiday week. 

"After peaking at an intra-day high of 99.667 on the 1st October, the dollar index has since declined by around 3% and is currently threatening to bring an end to the gradual up trend that has been in place since the middle of last year," says Fritz Louw, an analyst at MUFG. "Weakness in the US dollar towards the end of this year has coincided with the renewed expansion of the Fed’s balance and the paring back of pessimism over the outlook for global growth."

Above: Dollar Index shown at daily intervals.

Pound Sterling declined sharply after the December election due to profit-taking, leading to steep losses against all major rivals. Meanwhile, other currencies continued to trade within familiar ranges, creating scope for the British currency to advance on all its major rivals from the moment the Dollar began to weaken. 

Currrency traders have sold the Dollar en masse this week in response to multiple factors including strong indications the 'phase one deal' struck between the U.S. and China could be signed and formally entered into within weeks, which has boosted sentiment toward the global economy.

China's manufacturing PMI was also revealed overnight to have held onto its November gains in December, with the index remaining unchanged at 50.2, above the crucial 50.0 level that separates industry expansion from contraction.

"The Fed has signalled that it plans to continue expanding its balance sheet at least through the first half of next year thereby extending less favourable conditions for the US dollar. The options market is expecting more US dollar weakness over the next six months," Louw says. 

Above: Pound-to-Euro rate shown at daily intervals.

Federal Reserve (Fed) efforts to increase liquidity in the interbank money market have also been at play. The Fed has pumped Dollars into money markets at a rate of knots not seen since the quantitative easing (QE) years in recent months, leading to an oversupply of the greenback. 

This is after past attempts at returning the bank's balance sheet to pre-QE levels led to a shortage of 'reserves' in the interbank money market, which saw certain important market interest rates rise substantially above the current Federal Funds rate range. 

The Fed is expected to continue adding liquidity to the market over the coming months in order to keep the plumbing of the financial system working properly, which MUFG's Louw and others say will be bad for the Dollar.

That could mean more upside ahead for the Pound-to-Dollar and Pound-to-Euro rates however, the performance of the next stage of the Brexit negotiations will be front and centre for the British currency next year.

"We have been surprised by how quick the markets have been to readily assume that a sizeable majority would allow the Prime Minister to soften the edges of his Brexit plans. If anything, since the election, the PM has been keen to emphasise that the commitment to leave the transition phase by end-2020 is a manifesto pledge that he intends to adhere to," says Kamal Sharma, a strategist at BofA Global Research. "We are sceptical that GBP is as undervalued as many observers believe."

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