21 December 2020: Brexit chaos whether deal or no deal

Brexit chaos whether deal or no deal

21st December: Highlights

  • UK facing Covid calamity as Europe closes its doors
  • Late night compromise provides agreement over support
  • Renewed Covid outbreaks to hit any Q1 hope of recovery

Q1 outlook fading fast

The chances of the UK escaping an economic contraction in Q1 are fading fast.

Prime Minister Boris Johnson finally acted on Saturday to tighten Covid limitations. He created a new tier four in which he changed the relaxation of restrictions for Christmas.

In the south east of the country restrictions will not be lifted at all while in other areas the Christmas relaxation has been reduced from five days to Christmas Day only.

Tier Four is a further blow to the retail and hospitality sectors as all non-essential shops will have to close and the traditional Post-Christmas Sales will now be cancelled.

With restrictions likely to stay in force well into the New Year, the prospects for the economy have become severe.

Brexit negotiations continue with little positive news coming from that direction either With compromise needed, neither side seems prepared to take the extra step necessary.

The major channel port of Dover is likely to become virtually gridlocked as new requirements for documentation come into force in a little under two weeks’ time. In the short term, cross channel activity is suspended as France bans movement from the UK due to the presence of the new strain of Coronavirus.

Rishi Sunak announced a pre-emptive strike of support for workers who are likely to remain on furlough by extending the Government support until the end of April. He has already come under additional pressure to match the new tougher restrictions with more support.

There is no chance of employment data improving while the country remains under tight restrictions. These are likely to become even tighter before they are reduced, with the consequent effect on jobless numbers.

There is a concern that those who are working from home will drive up the savings rate to the detriment of retail sales, but until retail locations are able to start opening again, the issue will be systemic.

The pound continued to be supported last week by hopes of a Brexit settlement. This week, the market traditionally slows down for the start of the Holidays but with hospitality closed or closing all across Europe a period of stagnation is more likely.

The pound reached a high versus the dollar of 1.3624 but drifted lower to close at 1.3494.

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Student debt added to support measures.

Late night meetings and a massive amount of horse-trading has finally led congress into a draft agreement that will lend $900 billion in support to the economy.

The last major sticking point for Republicans was the ability of the Senate to curb the borrowing powers of the Federal Reserve, thus limiting expansion of the Central Bank’s Balance Sheet.

The new package would be second only to the package agreed last March which has been constantly criticized by Republicans who believe it was too generous, too general, and too long in its duration.

This has been labelled by Democrats as a Republican attempt to tie the hands of President-elect Biden as the Fed’s current authority runs out at the end of the year.

One previous Fed President Ben Bernanke was strident in his criticism of Republican efforts to limit the Fed’s borrowing ability. He fully supports new aid for families and businesses affected by the pandemic.

It is hoped that the aid package supported by the rollout of the Vaccine will help the U.S. economy recover from what has been a quarter that has come close to disaster with employment data weakening almost by the week.

Should the spread of new cases grow at a similar rate to what is being seen in the UK and Europe, hospitals may become overwhelmed even quicker that the vaccine can be distributed

The dollar index continues to fall despite some solid buyers around the 90. Last week.it fell to a low of 89.72, closing at 90.08.

Overnight at the start of the ne trading week in Asia, it has rallied on the back of the support agreement, It has so far reached 90.46

It is a tough call to predict the overall effect of an agreement on the dollar. Improving risk appetite could see it fall further but traders may see the levels being reached by the pound and euro as being unsustainable.

New restrictions to nip any recovery in the bud

EU Commission and ECB Officials are becoming expert at talking a good game. Confidence that is being shown in the economy growing, despite having very little basis in fact, is at least delaying reality.

With restrictions being introduced in some places and toughened in others the prospect for any meaningful recovery is being pushed further into the future.

Inflation continues to fall on a month-on-month basis as activity is curbed by lockdowns.

Italy is the latest nation to initiate a total lockdown and has joined Belgium and the Netherlands in cancelling flights from the UK due to the new strain of Coronavirus which led the UK into its latest measures. It is reported that France and Germany are considering joining them.

There is clear dissent growing between Paris and Brussels over the Brexit negotiations. EU Chief Negotiator Michel Barnier has commented that the issue of fishing right is still being discussed although the UK side still has questions over the post-Brexit relationship.

Militant French Fishermen have vowed to protest any agreement that takes away the rights they currently enjoy. They believe that President Macron could become the victim of some political expediency if he is persuaded not to use his veto on a deal which runs contrary to the best interests of the French Fleet.

With the end of the year approaching and many issues still to be agreed as well as the rollout of the vaccine and the spread of Covid-19(2) volatility is likely to be far higher than is usual.

It is the time of year when analysts and commentators make their predictions for the news year, but so far, they have been strangely pensive.

Last week the euro seemed to be running out of steam. It rose to a high of 1.2272, closing at 1.2246.

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.”