12 February 2021: EU trying to shut London out

EU trying to shut London out

12th February: Highlights

  • Financial Markets angst grows as Amsterdam pips London in equity trade
  • Jobless claims fall but still making insufficient progress
  • ECB and EU commission must maintain support to aid recovery

Johnson still prepared to talk

The developing row between London and Brussels over UK access to the EU’s financial markets is beginning to turn ugly.

The EU Commission appears to be stealthily working behind the scenes to not only promote Paris and Frankfurt as alternatives to London but to actively limit UK access.

The work towards an agreement is something of a phoney war. On the surface, the UK is unwilling to agree that it will mirror EU regulation for financial services, since it cannot agree in advance to any change in regulation that it may deem to be detrimental to its interests.

However, the real battle is for supremacy in the incredibly lucrative financial market, where London has always held the upper hand.

Brussels sees Brexit as the perfect opportunity to supplant London. It is similar to Brussels jealousy over the dollar’s position in the global economy, although the UK Prime Minister Boris Johnson says that all he wants is a level playing field and is willing to continue discussions until a workable compromise is found.

Bank of England Governor Andrew Bailey highlighted that the UK’s current regulations are far closer to those of the EU than those of the U.S., Canada, Australia, Hong Kong, and Brazil where Brussels has offered a far more harmonious relationship than it is willing to agree with London.

By leaving the treatment of financial services out of the Brexit agreement finally agreed in December, London finds itself in a precarious position which is far more significant financially if not socially, than the position fishermen now find themselves in.

While an agreement over this issue is vital to both sides, the entire market is becoming more and more driven by global rules enacted for a global market so at some point in the future, the entire discussion may well become irrelevant.

Today is a significant day for data releases in the UK. Preliminary data for Q4 GDP will be released, along with industrial and manufacturing output for December and trade data. The trade numbers have not been considered significant in the recent past, but the breakdown of trade with Europe will attract attention.

There is a degree of positivity around GDP. It is possible that the economy grew marginally in December despite the quarter being marred by two lockdowns.

The pound remained well supported yesterday, although it almost exactly mirrored the previous day’s rise. It fell to a low of 1,3800, closing at 1.3816. It remains unclear if the price action so far this week is a pause for breath, or a case of running out of steam, but today’s data will provide a clue.

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Market still concerned about inflationary effect of stimulus

Inflation remains a big deal amongst U.S. financial analysts. In certain quarters, probably driven by a deep-seated disagreement over the level of stimulus the Biden Government is planning, they are beginning to see signs of rising inflation down the road, that mere mortals struggle to identify.

Fed Chairman Jerome Powell who supports Treasury Secretary Janet Yellen in her newfound philosophy of go big or go home, was keen in a speech yesterday to preach patience and to let the situation develop naturally. He went on to say that it is clear that the FOMC has its finger in the nation’s pulse.

His term as Chairman has seen him develop a Central Bankers style when it comes to advance guidance, but he retains a lawyer’s trained eye when it comes to considering the issue, planning a response, and delivering a plan.

Employment is now a constant issue that the Administration hopes will be improved by the delivery of Biden’s huge stimulus plan.

The monthly non-farm data release has largely been supplanted by the weekly jobless claims number. This data appears more relevant and up to date than the seemingly cumbersome NFP. where adjustments are often significant due to the estimation of several parts of the report.

Yesterday’s release of weekly jobless data at least showed that claims are beginning to move in the right direction. Initial claims fell from 812k to 793k while continuing claims remain around 4500k to 4600k.

While analysts wrangle over the country’s inflationary prospects, getting the unemployment rate down to around 5% is vital to growth and eventually a real read on price growth.

The dollar index is in a similar position to Sterling. It saw a relatively big fall earlier in the week and has remained in a narrow range since. The question is what the catalysts for could be a continued decline could be or is a slightly higher base developing.

Yesterday, it traded between 90.47 and 90.26, closing at 90.40.

Euro making lower highs

Matteo Renzi, a former Italian Prime Minister yesterday hailed the formation of a Government led by Mario Draghi, proclaiming that Italy is back.

It is clear that while Draghi is possibly the most qualified to lead the financially challenged nation, it will be his policies and ability to convince his predecessors that the previous ways cannot continue that will count most.

Dialogue between Rome and Brussels is set to become less one sided, with the EU unable to dictate terms to Draghi. It is more likely that Draghi will present a plan that he will expect the EU Commission to rubber stamp.

After all, if he was trusted, indeed feted, while at the ECB to rescue the euro, surely what he decides will rescue a single nation.

There is a distinct lack of clarity being delivered by members of the ECB’s Governing council. The issue when every member is expected to wear two hats is that they will always tend to favour what is best for their home nation.

Yesterday, council member and Irish Central Bank Governor Gabriel Makhlouf was fervent in his demands that support from the ECB and EU Council must remain in place until the recovery is confirmed. This is obviously the view of the have nots, those nations who are net receivers of support. The haves will have a different view on when support should be reduced.

The euro is a mere pawn in the market’s perception of how the global economy will recover overall and its effect on risk appetite and, closer to home, how the EU commission will solve the issue of vaccine delivery and distribution.

Yesterday, it rose to a ten-day high of 1.2149, but fell back to close at 1.2132.

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.”