11 December 2020: Sterling falls as Brexit hopes fade

Sterling falls as Brexit hopes fade

11th December: Highlights

  • Economy expands in October…. just
  • Weekly jobless claims continue to rise
  • ECB adds stimulus but rates unchanged

No deal concerns fast becoming a reality

It is inconceivable that the UK and EU after spending so much time negotiating first a withdrawal agreement, then a trade deal and post-Brexit relationship find themselves two days away from disaster.

The degree of chaos that Brexit is going to bring to the logistics sector of the UK economy is already evident. In the south east of the country roads are already becoming clogged with lorries waiting to cross the channel while in several ports, there is a logjam developing with containers unable to be cleared through customs.

The issues in the ports are not just about Brexit, Covid has played a part as has an issue that has been developing for months with goods arriving from China. However, the country is experiencing the beginning of a living nightmare that will become reality in just three weeks.

There remains confusion about the paperwork that is necessary and there is the potential for 100km queues clogging roads in Kent as the full effect of Brexit is felt.

On the other side of the Channel, although Brussels remains defiant, there are the beginnings of shortages of parts that will slow down several industries, not least vehicle manufacture.

After so long negotiating, the financial market is still willing to believe that a deal will be reached in the next 48 hours.

However, if no deal is reached which, according to the Prime Minister, is now a real possibility, then both London and Brussels will suffer self-inflicted wounds that can only add to the turmoil that both will face next year as the Pandemic remains and both economies take a major hit.

Data released yesterday showed that the recovery virtually ground to a halt in October. The economy grew by just 0.4% in the month. Both industrial production and manufacturing output grew marginally but even a marginal improvement was better than analysts expected.

The pound continues to toy with a collapse in the event of no deal being agreed. Against the dollar, it fell to a low of 1.3245 yesterday, recovering a little to close at 1.3297. Should Sunday’s decision be bad news, the opening in Asia on Sunday evening could be brutal.

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Stimulus moving needed to vital

The U.S. economy is becoming desperate for an economic stimulus package to be agreed and delivered as the recovery grinds on and cases of Covid-19 grow almost out of control in several States.

The news was released overnight that the Pfizer/Biontech vaccine has been approved for use in the U.S. by the Food and Drug Administration. This will provide a boost to global risk appetite, but it still remains to be seen how large take up will be.

Outgoing Treasury Secretary Steve Mnuchin claimed yesterday that good progress has been made in talks between members on both sides of the aisle. However, real evidence is now being seen of the turmoil that the continued delay is causing.

Employment is close to being in tatters. Data released yesterday showed that weekly jobless claims rose from 716k to 853k and possibly more importantly the four-week average rose for the first time in several months.

Mnuchin and House Speaker Nancy Pelosi met last evening to discuss progress but there has, so far, been no announcement of any breakthrough.

The financial markets are no longer looking at the employment market in terms of a decline, and despite the hope provided by the approval of the vaccine, it will be a long, hard winter until a solid, reliable improvement is seen.

There is little doubt that the Fed is looking on in dismay. While Chairman Jerome Powell has said on many occasions that the Central Bank is prepared to act intra-meeting, it is fairly obvious that additional monetary stimulus won’t see support arrive in the right place.

Inflation is beginning to perk up, with the annual rate of increase 1.2% in November. The rise is unlikely to raise any more than an eyebrow that the Fed since it is expected to continue to rise, although any acceleration in the pace of the growth may see comment from Regional Presidents despite Powell already talking of moving the 2% target to more flexible arrangement.

The dollar index appears to have topped out in the short term. Yesterday, it fell back to a low of 90.66, closing at 90.78.

Economy unlikely to see growth next year

The market accepted yesterday’s announcement of a further Eur 500 billion of asset purchases by the ECB at face value and the news prompted a slight recovery for the euro.

With pre-Christmas economic activity being hit by the increasing number of cases of Coronavirus, it is feared that even though the UK and U.S. along with Canada, Saudi Arabia, Bahrain, and several other nations have approved the vaccine, the EU approval process may take longer to produce a positive response.

This is particularly relevant since it is unclear how the process works across all 27 member States.

As well as increasing the size of the asset purchase scheme from Eur1.35 trillion to Eur1.85 trillion, the Central Bank also extended its duration from the middle of next year until Spring 2022.

From her words following the decision, it appeared the ECB President Christine Lagarde, was prepared to write off 2021 as she only sees an improvement in activity really coming to fruition in early 2022.

Lagarde also commented that the Bank had been taken by surprise by the depth and duration of the second wave of the virus and didn’t expect the level of containment measures that have been needed.

It is possible that this comment was more of a shot across the bows of the EU commission which is, apparently, in deep negotiation with Poland and Hungary over the vetoing of the EU Budget and relief package.

It should not be forgotten that Brussels is also dealing with Brexit and although the effect on the UK economy is the subject of a large number of newspaper headlines, the effect on the EU economy is a fairly unknown quantity.

The Eurozone economy finds itself in a similar but possibly weaker position than the U.S. as it awaits the agreement of a package of fiscal support. The economy is almost certain to fall back into recession in the coming months irrespective of when the package is approved.

With the longest lead-in to pre-pandemic levels of GDP the Eurozone is facing major issues that it appears powerless to affect in the coming months.

The euro received a boost from the ECB decision and comments. It rose to a high of 1.2159, closing at 1.2242.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”