Another Deadline Broken as Talks Drag On

GBP

The Pound was the worst performing G10 currency last week as hopes for a trade deal between the UK and EU started to wane. Boris Johnson arrived in Brussels on Wednesday evening to have dinner with Ursula von der Leyen but was unable to close the gap on any of the key sticking points. On Friday he reported “”There are just two key things where we just can’t seem to make progress and that’s the kind of ratchet clause they’ve got in to keep the UK locked into whatever they want to do in terms of legislation, which obviously doesn’t work, and then there’s this whole issue of fish,”. The Bank of England Governor Andrew Baily applied extra pressure on Friday as they announced they would be reassessing the use of negative rates if there is a no deal.

Sterling has started the week with a slight spring in step as even though no deal has been announced but the fact that both sides are still talking mean the markets believe there is still chance of a deal. The UK and EU have agreed to keep negotiations going as late the 31st of December and many analysts are predicted a last-minute deal. It was reported from a number 10 source over the weekend that the mood of the negotiations had changed, and that the EU were now “engaging” with the problems. The Bank of England will be announcing their interest rate decision on Thursday but without a conclusion to the talks in Brussels they will likely keep interests rates unchanged. Data wise, Tuesday will bring unemployment data and Wednesday will see the announcement of CPI and Services PMI.

USD

The Dollar managed not to concede any further losses to the Euro as it found resistance at 1.2175, a two and a half year high for the most traded currency pair. Limited progress was made on the on the stimulus bill with treasury Secretary Steven Mnuchin presenting Nancy Pelosi with a $916 billion proposal, but the cool reaction from the Democrat side has suggested that more talks are needed. Trump has continued to claim victory of the election, but the markets have yet to pay him any attention and this will continue unless he starts making noises that he is unwilling to leave the Whitehouse come the 20th of January. On the data front CPI hit the expected level of 1.6% and the Michigan Consumer Sentiment Index was better than forecasts.

The stimulus bill will be the main driver for the Greenback this week as the reality of a Government shutdown becomes more likely. Given the current state of the US economy as the country struggles to contain Coronavirus, a Government shutdown will want to be avoided at all costs and should be enough motivation to allow both sides to come to an agreement. On Wednesday, the Fed will announce their interest rate decision though given the plans of the Fed, rates will remain unchanged. This should not affect the Dollar as Jerome Powell has been very clear on his plans to hold rates at historically low levels until inflation rises above 2%. Wednesday will also bring the only major data release for the US in the form of Retail Sales, forecast at -0.4%.

EUR

The Euro managed to remain well supported through a tricky week of political and policy uncertainty. The big event came on Thursday with the ECB interest rate decision and press conference which followed. Christine Lagarde and her colleagues kept interest rates at 0% and decided not to talk the Euro down which many analysts were expecting. This has signaled to the market that there is room for the single currency to hit new highs versus the Dollar and this will likely be achieved if a Brexit deal is reached. The ECB did announce that they will be increasing their quantitative easing programe by €500bn but this was well signaled and was expected by the markets and therefor didn’t have a meaningful impact. On the data front GDP for the eurozone was released on Tuesday at -4.3% slighting beating the target of -4.4%.

Brexit will continue to limit the gains the Euro can make versus the Dollar but if a deal does go ahead then the 1.23 level is expected to be achieved. Away from Brexit the Euro is in for quiet week with a light economic calendar and no more major events this year. Investors will instead be paying close attention to the approval of Covid-19 vaccines on the continent as this should provide a light at the end of the tunnel of a poor economic recovery due to the restriction placed earlier this year.