3 December 2020: Vaccine approved for use

Vaccine approved for use

3rd December: Highlights

  • The Internal Market Bill remains
  • Moderate growth to be sufficient for next two quarters
  • Eurozone recovery to not last long

Second lockdown suppresses Coronavirus and economy

The prospect of an agreement between the UK and EU over a trade deal, and the additional conditions that accompany it remains in the balance. A spokesman for Prime Minister Boris Johnson confirmed yesterday that the UK’s position over the Internal Market Bill remains unchanged.

This could be a supplementary stumbling block even if agreement over the other outstanding issues is reached. When it was passed by Parliament recently the Bill was labelled by Brussels as being in contravention of the agreement that is already in place.

Since the Bill was put in place to provide clarity in what happens over the passage of goods between the Mainland and Northern Ireland in the event of no trade deal being agreed, it will become moot, only if an agreement is reached.

Monday’s combination of a weakening dollar and almost a sense of euphoria over Brexit led the pound into waters that have not been visited for some considerable time. The last time the pound closed above 1.34 versus the dollar was almost a year ago and was in response to the result of the General Election.

Unfortunately, the Brexit bubble burst yesterday as concerns over an impending deal grew. It was perhaps significant that following Johnson repeating his claim that the UK would flourish even without a deal, the Chancellor repeated the sentiment yesterday.

EU Chief Negotiator Michel Barnier pushed back against the growing sense of optimism. He made it clear that despite the underlying economic conditions facing both sides, Brussels will not be rushed or railroaded into an agreement.

France has been vocal over the past few days in its condemnation of what it calls a sub-optimal deal but in the end that is probably what both sides will have to accept.

The French issue surrounds fishing rights with the UK under pressure to disregard the hardship that a deal allowing EU boats access to British waters would bring to the South-West of the Country and concentrate on how economically insignificant the industry is to overall GDP.

Were the UK to accede to EU demands, it would be seen as a betrayal of promises made during the last election campaign and could damage the Government’s standing across the entire country.

The pound suffered at the hands of both the dollar and euro yesterday. Versus the dollar it fell to a low of 1.3287 but recovered to close at 1.3367 while against the euro it fell to a 1.1007, closing at 1.1036.

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After the tumultuous election above trend growth can wait

In true Democrat style, the current activity that is being seen in the U.S. economy which is neither seeing a stellar recovery nor a collapse following the difficulties created by the second wave of Coronavirus is being treated as acceptable.

This is somewhat underwhelming for the markets and goes hand in hand with the feeling that a Fed run by Jerome Powell and a Treasury run by Janet Yellen will be too passive and cautious to provide the degree of recovery several (mostly Republican) States are demanding.

The Beige Book is the Fed’s official report, issued eight times a year, outlining its view of current economic conditions. The latest release which was published yesterday used words like modest and moderate when describing the economy and prospects for growth.

This report is primarily produced to aid members of the FOMC when they discuss monetary policy at any upcoming meeting. The next FOMC will be in two weeks and will be accompanied by up to date economic projections, many of which will have been contained in the beige book.

Employment data due for release between yesterday and tomorrow is likely to reflect a softening, yet acceptable, (for now) picture.

Private sector employment as defined in the ADP report released yesterday showed that 307K new jobs were created versus 404k in October.

Weekly jobless claims are expected to remain at a level similar to the previous week at 775k with the possibility that continuing claims return to an increase.

Meanwhile, tomorrow’s NFP report is expected to show that around 500k new jobs were created versus 638k in October.

The dollar index continued its recent slide based upon continuing bipartisan discussions regarding a relief package. It fell to a low of 90.99 and closed just two pips from that level.

Is the rise above 1.2080 sustainable?

The ECB appears to be in a period of passive acceptance of just about every part of the economy, including the elevated level of the euro.

There appears to be a significant wringing of hands and a promise that things will get better when the vaccine arrives.

While the production of a vaccine should undoubtedly produce a lift for the single currency, for it to be trading at its highest level in thirty months is a testament to the seismic shifts in the performance of the FX market. It appears to see the dollar index as primarily a gauge of global risk appetite, while its constituent parts are simply along for the ride.

Given the parlous state of several individual nations’ economies, with Spain, as an example, suffering the biggest fall in GDP of any developed nation this year, very little imagination is being used to find a solution to the economic crisis other than to pump more money into the economy.

Several analysts and economists see this as throwing good money after bad, but it is likely to continue when the ECB Governing Council next meets.

With a lack of public concern being displayed by the EU Commission over the vetoing of the budget and PEPP by Poland and Hungary, the States most in need of assistance may be beginning to feel more than a little isolated.

Trust in the relationship of the ECB with several top European banks has been called into question following the Central Bank’s Chief Economist’s calls to several before recent ECB meetings which have been described as both front-running and anticipating Governing Council decisions.

There is no question that the Governing Council is a large and unwieldy beast, but if that is the makeup of the decision-making process then that should be respected.

While such a story may be little more than froth on the cappuccino, it serves to remind markets and traders of the difficulties that Central Banks are facing globally in ensuring that their policies fit with the ability of commercial banks to lend.

The euro continues to require oxygen as it continues to climb without a safety net. It rose to a high of 1.2114 yesterday and closed at that level.

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.”