27 October 2020: Assume nothing as talks resume

Assume nothing as talks resume

27th October: Highlights

  • Brexit grabbing headlines but a deal is a way off still
  • Has Trump done enough economically?
  • Buba sees slower recovery in Germany

Market is still expecting a deal

It is going to take a very long time before the UK economy fully recovers from Covid-19, but no matter how long that period is, at the end of it the UK will still have left the EU and the circumstances of its departure will echo for a generation.

Although most people are sick of hearing about it, the UK’s £900 billion trading relationship is crucial to the country’s economy despite the medium-term issues being created by the pandemic.

While everything is on the table as far as EU Chief Negotiator Michel Barnier is concerned, the most important factor over the past couple of weeks is that his opposite number, David Frost told him not to come to London for talks last week unless something fundamental had changed.

It seems that Barnier had got himself into a cosy position, assuming that talks would continue but with little point until the UK changed its demands. Now, the EU is beginning to see the importance of the UK as a trading partner and it is expected that the pace can pick up. The fact that there have been very few comments coming out of the talks could mean that something is happening at last.

The political upheaval around the Pandemic appears to have quieted down for the time being as Chancellor Sunak’s revised package of measures is being adopted. There has been something of a hiatus around the case numbers and fatalities over the past few days, but they remain a great concern.

The wider hospitality sector remains the most significant ongoing victim of the crisis, with large swathes of the country entering or threatening to enter Tier Three of the Government’s measures just as its busiest period of the year approaches.

The pound has struggled to make fresh headway versus the dollar having climbed to recent highs last week. Yesterday, it briefly traded below the critical 1.30 level, reaching a low of 1.2993 but it recovered to close at 1.3023

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Pelosi’s confident over pre-election a support package

Although the President has declared himself free of Covid-19 and immune from the deadly virus, his fellow Americans are contracting the disease and dying in increasing numbers.

In an echo from the first wave of infections where the U.S’ preparations were delayed by a sense of over-confidence; the President is again playing down the seriousness of the second wave labelling it little worse than flu.

As the economic recovery from the virus stumbles and becomes patchy, employment and the effect of the virus on those least able to cope grows, Congress is still unable to provide the support that is both necessary and warranted to help those whose livelihoods have all but disappeared.

Ever since the end of July when the original package of measures expired, both sides have used the negotiations over their renewal as a stick to beat the other with.

The President has wasted no opportunity to berate the Congressional Speaker for the delay. The terms he has attached to any deal have caused Nancy Pelosi, the Democrat Speaker to accuse Trump of not really being interested in increasing employment benefits as he considers them to be un-American.

Yesterday, Pelosi said that she still believes a deal can be done before the election which is now just a week away.

Although the campaigning has been a little more low-key than normal, the restrictions brought about by the Pandemic appear to have favoured Biden more than Trump.

While Trump is known for huge tub-thumping rallies where he can self-congratulate over the wonderful job he has done for the country, Biden is more considered in his speeches.

It remains to be seen if the anyone but Trump advantage that Biden has held is a significant factor but for the economy, the relief package remains the most important remaining piece of business for this Administration.

Yesterday, the dollar index struggled to gain a foothold following another correction. It fell to a low of 92.78 but recovered to close at 93.06.

German Central bank sees slow German recovery

It is doubtful even her worst enemy would not have wished Christine Lagarde’s first year as President of the ECB to turn out as it has. The pressure she has faced to drive the economy in face of enormous odds has doubtless brought a sigh of relief from her rivals for the post.

This week, Lagarde will preside over a hopelessly divided General Council where the anxiety driven by the need to provide even more stimulus will grow.

The EU and the Monetary Union that was delivered more than twenty years ago have faced several crises but all through that period, the shining beacon for the region has been financial discipline.

One of the first and most important tenets of the coming together of individual states was for acceptance of the need for a low inflation low interest rate economy.

Despite the upheaval caused by the financial crisis where Germany stepped in to inflict significant damage on some nations, for their own good, Stability has been the watchword for the economy.

Now, that has been completely destroyed, just as Brussels had tried to look to the future by appointing a more politically driven President who was able to take the Central Bank forward, developing a strategy for a more fiscal union.

Germany which has been the driving force behind the growth of the Eurozone into a global trading bloc, has started to struggle with the second wave of the virus.

Chancellor Merkel is said to be considering a new lockdown although she isn’t expected to announce such draconian measures that characterized the first.

With the economy teetering on a knife edge as deflation remains, any new measures will need to be seen to be helping both the economy and the protection of the population.

Yesterday, the euro continued to shy away from fresh gains. It has now traded in an almost identical range for four sessions, supported at 1.1800, but struggling to break above 1.1865. Yesterday, it closed at 1.1810.

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.”