4 December 2020: Brexit driving Sterling

Brexit driving Sterling

4th December: Highlights

  • Brexit optimism pushes Sterling back to year’s peak
  • Jobless claims improve, now for NFP. Stimulus still the main focus
  • Activity still declining

Deal in the balance but optimism remains

As negotiations continue over a trade deal between the UK and the EU, there are very mixed messages coming from both sides. After a rather disappointing round of talks on Wednesday, yesterday appeared to hold out much more hope. As was mentioned yesterday, the matter of fishing rights is punching well above its weight in discussions. It is often the case that a symbolic cause carries more weight than something more basic and meaningful.

Despite an air of optimism, there has been no significant comment over the matters of competition and Government support. It has been fishing where the militancy of the French fleet is well known that there has been open disagreement.

It was expected that this would be the week when an agreement of sorts would be confirmed. This would give the EU Commission and British Parliament a chance to ratify the terms without the late-night dramas that were seen a year ago.

A Government source was quoted as saying that the EU delegation brought a new element to talks late in the day, but this may be little more than a tactic since it wasn’t taken seriously by the financial markets.

Elsewhere, logistical issues are the only barrier to the UK being able to begin vaccinations next week. With the Pfizer/Biontech vaccine needing to be stored and delivered at extremely low temperatures a degree of caution over the supply chain has developed.

Data for services activity was appreciably stronger than expected although it remained in negative territory. The rise may be short lived given the pressure being brought by the new restrictions where 99% of the country is in either tier two or three.

The pound reached an elusive target yesterday as it managed to touch the 1.35 level versus the dollar.

Experience dictates that we are seeing the final throes of an exhaustive rally and a bout of buying the rumour and selling the fact may be about to start. Indeed, investors have been active in the derivative market buying protection against a sharp fall.

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Biden promises that things will improve

There has already been a sea-change in the rhetoric being delivered from the Administration. Where Donald Trump used threats and hectoring officials to get the job done (as best he could), Joe Biden is far more carrot than stick and it is clear that he means to be open with the country about what is happening and how he is expecting to deliver.

Getting an opinion about the future direction has not been difficult in the past few weeks, but it has a lot to do with Political Affiliation and little to do with what is happening on the ground.

Despite a few shaky data releases, it needs to be remembered that the Fed has a steady hand on the tiller ably supported by Regional Fed Presidents with great insight into both the situation in the regions and a strong level of faith in the FOMC.

The appointment of Janet Yellen as Treasury Secretary may be considered a master stroke in the long term. The ability to build a working bridge between the two major financial departments should see a marriage between Fiscal and Monetary policy lacking in several G7 members (see below).

We are now more than halfway through the employment reporting part of the new month, with what may be used to be the most important part of the three reports, to be released later today.

Yesterday’s report on weekly jobless claims saw initial claims fall from a marginally upwardly adjusted 787k to 712k. This contributed to a continuing fall in continuing claims which from 6,089, to 5,520k. As has been said before maybe the fall wasn’t stellar, but with an administration which won’t be dealing in hyperbole, the economy continues to move in the right direction.

The Non-farm payrolls remain as volatile as ever. The November number is predicted to see a fall from 638k new jobs in October to 450k in November. Again, moving in the right direction.

A support package is continuing to be negotiated and it is refreshing to see both sides of the aisle not blaming each other for any delay.

The dollar index continues to see new long-term lows. Yesterday, it fell to a low of 90.51, closing at 90.69. It is impossible to say where this fall will end but it is impossible to buck a trend.

ECB highly likely to inject further stimulus

The ECB is so burdened by its desire to provide advance guidance to the market, even having its chief Economist contact several banks in European Capitals to discuss its next move, that any degree of surprise has been forfeit.

The financial markets have absolutely no doubt that the ECB will add stimulus next week.

It could be a further Eur 500 billion, but they will not increase the length of the program which is expected to end at the end of next year.

That is to say it may well be in a position to halt purchases but its bloated balance sheet will remain since selling off the debt, which would, if necessary stave off rising inflation to a certain extent, prove to be difficult if not impossible.

Indeed, there may be more calls for certain countries’ debt to be carried indefinitely or even written off.

Data releases for November carry on the trend of a shrinking economy. This is hardly a surprise, since large swathes of the Eurozone were in lockdown and the usually more active areas may see their restrictions carry on well into this month.

Both services and composite activity data rose marginally but they were both coming form an extremely low base.

Services output in November rose from 41.3 to 41.7 while the composite index of manufacturing and services together climbed from 45.1 to 45.3.

One positive feature of the day’s data releases was the increase in retail sales which saw a rise of 4.3% from 2.5% and a market expectation of 2.7%.

It is hard to find the right words for the euro’s continued rise. It rallied yesterday to a high of 1.2174 but fell back to close at 1.2144. As with Sterling it is hard to stand in the way of a runaway train but considering the overbought position, a fall when it comes could be brutal.

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.”