The pound hit its highest level of the year against the dollar on the final day of 2020, as traders took heart from the UK parliament’s approval of Britain’s post-Brexit trade deal — a key formality in avoiding a more disruptive break from the EU’s single market.

Sterling, which has been rallying since March’s market turmoil, rose 0.3 per cent to $1.3659 in thin trading in London. It also climbed 0.9 per cent against the euro to €1.1171.

The pound has moved modestly higher since the UK and EU struck a deal on the shape of future trading arrangements on Christmas Eve, after mounting concern this month that the post-Brexit transition period might end on January 1 without an agreement. The deal was overwhelmingly approved by parliament on Wednesday.

“While not perfect, we certainly think it’s a reasonable deal and takes away that cliff edge of the United Kingdom exiting without a trading relationship for goods,” said David Zahn, head of European fixed income at Franklin Templeton.

Savvas Savouri, chief economist at hedge fund Toscafund, who backed Brexit and who has said that sterling should rise to about €1.30 if a deal was struck, questioned in a note this week why the pound had not rallied more forcefully following the agreement.

“I struggle to identify even a small ‘extra win’ the UK side could have extracted, and at the same cannot see any glaring fail. The win was in fact getting a deal done,” he said.

Line chart of sterling/dollar bid price showing how the Brexit deal lifted sterling to a 2020 high

Instead, it appears that a deal had already been anticipated by investors, and largely priced into the exchange rate.

The gains mean sterling, which has been constantly buffeted by concerns over the UK’s withdrawal from the EU since the June 2016 referendum, has gained about 3 per cent against the dollar this year. The euro, however, has increased just over 6 per cent against the pound this year, and close to 10 per cent against the dollar. The Australian dollar has also advanced 10 per cent against its US counterpart.

Sterling’s gains against the dollar this year have largely been driven by the weakness in the greenback, which has lost ground as a result of the US Federal Reserve’s loose monetary policy to combat the economic damage from coronavirus.

The stronger pound weighed on the export-focused FTSE 100, which closed down 1.5 per cent on Thursday, leaving it down about 14 per cent for 2020. A number of stocks that had rallied sharply following last month’s positive vaccine news gave back ground as tighter restrictions to stop the spread of coronavirus came into force.

International Airlines Group fell 4.5 per cent. Ireland on Wednesday extended a ban on travel to the country from the UK. Land Securities and British Land fell 2.3 per cent and 2.4 per cent respectively.

However, US hedge fund manager Bill Ackman’s $11.4bn investment vehicle Pershing Square Holdings, which was promoted to the blue-chip index a fortnight ago, rose 1.2 per cent.

Other European stock markets also ended the year on a down note, despite some overnight gains in Asia. The Europe-wide Stoxx 600 lost 0.3 per cent on Thursday, leaving it down 3.8 per cent for the year. Germany’s Dax also dropped 0.3 per cent, although it finished up 3.6 per cent this year. France’s CAC 40 fell 0.9 per cent on Thursday, putting it down 7.1 per cent for the year.