9 December 2020: Brexit remains in the balance

Brexit remains in the balance

9th December: Highlights

  • UK compromises over the Internal Market
  • Support to cost over $3 trillion
  • Data points to recovery but can it be relied upon?

The UK’s compromise means nothing to Brussels

The agreement reached yesterday between the UK and EU over the treatment of goods entering or leaving Northern Ireland will have no material influence over the talks taking place over a trade deal and the future relationship.

That is because the Internal Market Bill which was passed by Parliament a few weeks ago was, according to Brussels, both outside of the framework of the original Withdrawal Agreement and potentially against the law.

Therefore, all that has happened is that the UK has reset its stance, and this allowed the deal to be concluded.

Meanwhile, in the main event, there has been no progress in talks between the respective negotiating teams and it will be left to EU Commission President Ursula von der Leyen and Boris Johnson, who will travel to Brussels today, to find what is being labelled a political solution.

The UK became the first nation in the world to start vaccinating against Coronavirus using a vaccine that has been fully tested and approved for use.

This is a massive step forward for the country in its efforts to fight the Pandemic although both the Prime Minister and Health Minister maintain that continued caution is necessary.

This point was highlighted by the fact that although the rate of infection continues to fall, cases in London have begun to increase.

Chancellor Rishi Sunak, having provided all the support he felt was necessary to help the country at least survive the second wave of Covid-19, is facing further calls for support should there be no deal agreed. Yesterday he ruled out an emergency budget until it becomes clear exactly what the fallout will be.

This is exactly the issue that has been highlighted by Opposition Parties every time he provides the House of Commons with a relief proposal. He is often accused of being too reactive in his actions. It has been at least two years since a no deal departure was considered a possibility, so now, the Treasury should already have an oven ready plan.

Nonetheless, the financial markets remain optimistic that a deal will be agreed. Ironically, this has probably been made more likely by the effect on both economies of the Pandemic. Despite the belligerence of both sides’ words, today could be the day that the clouds part and a deal is agreed. Of course, it appears just as likely to be another false dawn.

The pound fell again versus the dollar yesterday, making a low of 1.3289. It found a degree of support at that level and managed to recover to close at 1.3356, as traders appear prepared to remain optimistic over Brexit.

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Workers, families small businesses, infrastructure and more

A prominent think tank in the U.S. reported yesterday that it believes a support package totalling between $3.5 trillion and $4 trillion will be needed to ensure that the economy continues to recover with a goal of returning to pre-pandemic levels of growth in as short a period as possible.

Both the House Speaker and Senate Minority Leader rejected what has become known as the Mnuchin Plan yesterday. Both Nancy Pelosi and Chuck Schumer believe that the plan, valued at around $920 billion is a useful start to a bipartisan agreement but continuing talks is the best hope of a solution in the short term.

Schumer went on to call upon President-elect Biden to cancel all student loans to provide those who will join the workforce but are struggling to find employment, a helping hand. He was also more vociferous than Pelosi in rejecting the proposed plan which has already been signed off by the White House.

Under the plan, the White House, which appears to be slowly emerging from the trauma caused by the election result, proposes $600 in stimulus checks while the Democrats are calling for that figure to be doubled. This would be in keeping with the previous plan.

That package, which was rushed through at a time when the full extent of the fallout was unknown, is still considered by Republicans as being too generous.

Last week’s employment data was mixed at best, with a surprisingly low figure for new jobs being created. This is likely due to the extent of the second wave of Coronavirus and, through Democrat eyes, highlights the need for a new and effective package of support measures.

Tomorrow’s weekly jobless claims numbers will be eagerly expected, to add to the picture of whether the recovery is bottoming out, or if a rise in claims was just a blip.

The dollar index appears to be slowing its rate of descent. Yesterday it made a high of 91.01 but fell back to close at 90.75. The President elect has announced a plan to provide 100 million vaccinations in the first 100 days of the program. The question is, when will that 100 days start?

Has the vaccine news turned confidence around?

Data released yesterday showed an explosion in the confidence of both individuals and business in a recovery for the economy going forward.

It was impossible to predict that the ZEW index of economic sentiment would rise this month from 32.8 in November to 54.4. Other indexes also had exponential increases.

The current situation in Germany was still weak but, again, future expectations were far higher.

The latest data for the contraction in the economy was also marginally improved.

This massive improvement in a leading indicator is being attributed to the development of a working vaccine and it will now be down to the Bureaucrats in Brussels to ensure that the path of the vaccine through the regulation process is as swift and smooth as it has been in the UK.

These increases in sentiment were by far, the largest since records began in 1995 and employment growth has also seen a boost as confidence improves.

Spain, Austria, and Ireland all saw employment growth of more than 3% in Q3 although this came before the latest series of lockdowns and other preventative measures.

There have already been commentators who have called the positive news a one-off and called for restraint as the ECB starts its two-day monetary policy meeting. They also caution against any wavering from the path of additional support via the PEPP.

Until there is movement over additional fiscal support which continues to be delayed by Poland and Hungary, the Eurozone economy will remain in limbo.

The euro appears to have found a level of resistance that will be difficult to break as traders decided that one set of encouraging data is not enough for a further buying spurt. Yesterday, the single currency fell to a low of 1.2078, closing at 1.2106.

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.”