Pound off 2-1/2-year peak after Brexit deal, US stimulus in limbo

The pound hovered below a 2-1/2-year high on Friday after Britain and the European Union struck a narrow Brexit trade deal, while overall sentiment in currency markets was tempered by a stalled U.S. coronavirus economic relief package.

The sterling last stood at $1.3549, having failed to rise above its 2-1/2-year high of $1.3625 hit last week Britain clinched a Brexit trade deal with the EU, just seven days before it exits the world's biggest trading bloc.

Against the euro, the pound fetched 89.80 pence per euro, after scaling a three-week high of 89.54 on Thursday.

The British currency also hit a 3-1/2-month high of 141.06 yen before easing to 140.22 on the Japanese currency, though trade was slow as many financial markets were shut for Christmas.

While the Brexit deal will preserve Britain's zero-tariff and zero-quota access to the bloc's single market and avoid a damaging "no-deal" exit, it does not cover the nation's much larger and influential finance sector. And, Brussels has made no decision yet on whether to grant Britain access to the bloc's financial market.

"It is important to recognise this is just the beginning of a new trading relationship that can be built on," wrote Gavin Friend, senior market strategist at National Australia Bank in London.

"We also have to stand by for both sides to spin the deal in their respective ways designed for domestic consumption. Invariably the national press will respectively talk of ‘wins’ versus the other side."

While the deal was a relief to every market player, the bare-bones nature of the pact leaves Britain far more detached from the EU, analysts say, suggesting the discount that has dogged UK assets since 2016 will not vanish soon.

"Now the deal is done, over time, we are going to start to see economic impact of leaving the EU. And I think that's clearly negative for the UK economy," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

"I would think the pound will slip after all things positive about a deal have already been priced in," he added.

Also hindering the UK economy in the near-term, the prevalence of COVID-19 cases in England jumped, with one in every 85 people infected in the latest week as a new infectious strain of virus rages in the south east of the country.

The U.S. dollar was hemmed in tight range as a standoff on a $2.3 trillion coronavirus in Washington continued and raised the prospect of a partial government shutdown.

The dollar traded at 103.55 yen, down 0.2% on the day while the euro traded almost flat at $1.2188.

The dollar index stood at 90.285, off its 2 1/2-year low of 89.723 touched last week.

The offshore Chinese yuan was flat at 6.5185 per dollar .