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The US dollar falls on positive sentiment

The recent US dollar winning streak came to an end overnight as the dollar index fell 0.27% to 90.41. The positive risk tone in Asia today has seen the index ease further by another 0.27% to 90.16. Most of the fall overnight and this morning can be attributed to sterling’s rise on Brexit developments. However, in general, the US dollar is easing across the board versus major currencies, with the Australian dollar and euro rising 0.25%, while the pound has risen 0.53% to 1.3555.

The pound has posted gains on expectations that a Brexit agreement is imminent. Still, with much of the UK under lockdown due to a resurgence in Covid-19, it is perhaps not surprising that sterling’s bullish reaction is underwhelming. Not helping is that the world is long enough sterling to fill in the English Channel.

A firm CNY fixing by the PBOC has seen USD/CNY falling 0.15% to 6.5300. That pattern repeats across Asian regional currencies, with the Thai baht, Singapore dollar, Malaysian ringgit and notably, the Korean won all trading between 0.15% and 0.30% higher.

With volumes thinned ahead of the holiday break worldwide, most attention remains firmly on the British pound. The weight of long positioning in sterling has meant that gains have been less exuberant than would have been otherwise expected. Markets are also likely to be holding back until the Prime Minister’s address today, having been led to water so many times over the last four years, or is it five?

Sterling’s recent high at 1.3625 remains its initial target, and GBP/USD should be set for further gains to 1.3800 if the Brexit Christmas Carol plays out as expected. Further gains from there will depend on the agreement’s actual nuts and bolts and its interpretation by markets. Given the thin liquidity conditions over the holiday season, a move above 1.4000 cannot be ruled out.