7 December 2020: Brexit talks continue

Brexit talks continue

7th December: Highlights

  • Brexit talks in need of magic touch
  • Disappointing jobs data highlights need for stimulus package
  • ECB to send more good money after bad

Rumours of fishing agreement denied by No.10

The fact that Brexit trade talks are continuing well into December is the perfect illustration of just how important a deal is to both sides.

Talks between the UK and EU Chief negotiators resumed yesterday following a tense phone call between the Prime Minister and EU Commission President on Friday evening. Another such call will take place this evening.

It must be expected that an overall agreement must be within reach otherwise it is hard to imagine why talks are continuing at this late stage.

The Chancellor of the Exchequer has begun to consider how he will start to recoup some of the money he has provided to help all areas of the economy to survive the Pandemic.

It is likely that other than smaller individual schemes he is likely to have finished large scale assistance.

In keeping with his concern over the levels of debt being taken on by firms involved in leveraged buyouts which have again become prominent following high-profile collapses in high street retail one scheme he is considering harks back to the days of Margaret Thatcher.

Thatcher was so encouraged by her scheme to promote home ownership that her Chancellor removed the tax relief on mortgage interest.

In a reversal of such a scheme, Rishi Sunak is considering stopping businesses ability to claim interest rate payments on debt against tax. This would be a major change to business accounting.

It would both force firms to be more creative in how they grow their operations and do away with retail firms’ hope over expectation that the tills would continue to ring come what may in order to finance debt created by leverage.

Last week, the hopes of a Brexit deal and the start of Covid vaccinations pushed the pound to a multi-year high versus the dollar. However, in the end the lack of a deal saw long positions cut. It made a brief high of 1.3539, ending the week at 1.3437.

This week the Brexit talks will continue to drive the pound’s direction with positive rumours likely to see it challenge the high again.

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Biden claims help is coming

In a few G7 economies, the level of fiscal support being given is being faded in favour of monetary injections. However, in the U.S the opposite is true. This is primarily due to the fact that despite the size and scale of the packages that have been created, they have not been allowed to continue into the second phase of infections.

Following the election, which Donald Trump appears to have finally accepted that he lost, the confusion he created by challenging the result has seen Congress take its eye off the support ball.

Last week in Testimony before the finance committee the continuing rift between Jerome Powell and Steve Mnuchin was further exposed. While Powell expressed his disappointment that no action had so far been taken, Mnuchin was fulsome in his praise for the Bipartisan efforts being made.

It is now to be hoped that Republicans in both Houses are prepared to emerge from Trump’s shadow to find a way to cooperate and pass a long-awaited package of measures.

While a relief package is currently the number one priority of the incoming Administration, Biden has begun to outline his economic strategy. Democrat Presidents are usually more grounded in the economy than Republicans who prefer to concentrate on foreign affairs.

His Treasury team, likely to be headed by former Fed President Janet Yellen, will be tasked with looking at structural anomalies and inconsistencies that exist once the Pandemic is under control.

A survey released last week that was contributed to by several prominent economists concluded that, at the current rate, and provided the Coronavirus vaccine is both successful and widely distributed, the economy can be back above pre-Pandemic levels by the end of 2022 at the latest.

That will allow Biden time to stop firefighting and implement policies he desires to unify the country following four divisive years.

The return of risk appetite to global financial markets continues to push the dollar index lower. It fell to a low of 90.51 last week, closing at 90.61. The continuing rise of fresh Covid cases in the U.S. may see the rate of decline slow but with further easing likely at next week’s FOMC meeting it may continue to fall throughout December in thinning markets.

ECB to add stimulus this week

The growing difference between the ECB and FOMC about how the economic effect of the Pandemic should be handled will be highlighted again this week.

While it is likely that a package of fiscal measures will be delivered by Congress in the coming weeks, political game playing will stop such an advance being seen in Europe.

It is fairly obvious that ECB President, Christine Lagarde would like to be in a similar position to Jerome Powell where she has both a colleague who is specifically responsible for fiscal intervention, but she is left to battle a collapsing economy with limited tools and cooperation.

Later this week, Lagarde will almost certainly preside over an ECB meeting at which a further injection of QE will see up to EUR 500 billion injected into the system over the next year.

While such support will be welcomed, it will not provide the same amount of stimulus to the economy as a fiscal intervention will (or would). If negotiations between the EU Commission on the one side and Poland and Hungary on the other are taking place they are being held in conditions of great security.

There is very little being said about the economic effect on the EU of Brexit. With talks continuing, the hit to the UK economy of a no deal outcome will undoubtedly be more severe, but it will not go unnoticed as a further contributor to the continuing downturn being felt right across the Eurozone.

Structural reform should be a major undertaking for the entire EU once the Pandemic is over. While the economy is unlikely to return to pre-Pandemic levels until the end of 2023, budgetary realignment, the management of monetary policy by the ECB and more focus on fiscal union must be made priorities if the entire Union is to survive.

Last week, the euro broke, and held, above the 1.20 level versus the dollar. It reached a high of 1.2177 making highs close to that level on Thursday and Friday. It closed the week at 1.2127 with further gains towards 1.2180 undoubtedly attracting selling interest.

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.”