The Final Showdown

GBP

Last week was one of the most volatile for the Pound as the Brexit merry go round continued, leading to sterling having a price range of 1.7% against the dollar and 1% against the Euro. The rumours continued to circulate with stacks of pizzas getting delivered to late night negotiations and leaked news that the “tunnel” had officially been entered. Though this only lasted 12 hours before Michele Barnier had broken it and reported back to the EU. Traders and investors spent the week continuously reevaluating the Pound which led to the aforementioned volatility. Away from the Brexit, the Government announced plans for the roll-out of the Pfizer vaccine as the UK were the first country to approve the vaccine after just seven months from the start of clinical trials. Data wise the UK outperformed expectations for both Construction and Services PMI’s though services fell below 50 showing a contraction in the sector compared to the month before. Not surprising as the country was in national lockdown.

This should be the final week for negotiations as both sides will want conclude talks before the start of the EU summit on Thursday, though Brexit and deadline extensions seem to go hand in hand. The UK government have reported over the weekend that a deal is to be done but certain sticking points remain, and the EU must “respect UK sovereignty”. France has threatened to veto any deal if it does not like the terms of the agreement and this can easily be seen as Macron apply pressure on the UK Government on fishing rights. Though given the current strength of the Pound, a deal still looks likely. The reaction of Sterling if a deal is agreed will be based on the actual context of the deal and most critically how it will affect the UK services industry. Many analysts are expecting a short sharp rise for the Pound before dropping back of again as details are revealed.

USD

The Dollar’s poor form continued yet again this week as it struggled to find any reason to stabilise, as it reached a two and half year low versus the Euro. Jerome Powell, Chair of the Federal Reserve testified in front of congress on Tuesday where he confirmed that interest rate would be kept at historical lows until the US shows inflation above 2%. Markets do not believe that this target will be reached anytime soon so the Greenback continued to slide. Non-farm payrolls added further to the Dollar weakness as they were released at 245k, missing expectations of 460k.

This week, markets will be watching the US for two reasons, firstly the progression of bi-partisan stimulus bill currently valued at $908 billion and secondly if the FDA will approve the Pfizer vaccine. Both will lead to further dollar weakness if they are passed as they will reduce risk and therefor decrease demand for a safe-haven currency such as the Dollar. Though many analysts now feel the Dollar has been oversold and that a correction is on it way this week as the Greenback is currently trading at a discount compared to its short-term drivers. On the data front, the US sees major releases on Thursday with CPI expected at 1.8% and on Friday with Consumer sentiment.

EUR

The Euro started last week well as it got a boost from the news that Britain had approved the Pfizer vaccine which has led to an enhanced economic outlook for 2021. This low-risk sentiment for the euro led to gains of 1.5% against the Dollar, 1.7% against the Sterling and was the 3rd strongest G10 currency last week. Though it was not all positive for the Euro as both Poland and Hungary remain creditable threats to the progress of the EU recovery fund. It was widely expected that if 1.20 level were broken on EUR/USD then ECB officials would try and talk the Euro down, but this did not occur even as the euro smashed through 1.21. Data wise CPI narrowly missed expectations on Tuesday at 0.3% versus 0.2%. Retail sales were released on Thursday at showed a massive bounce back at 4.3% versus expectations of 2.7%.

This week is shaping up to be the last big week of the year for the Euro with what is being termed as “Super Thursday”. This is the combination of the EU Leaders Summit, which should reveal the progress of the EU recovery fun. The ECB rate decision and press conference, rates are expected to stay the same but if the ECB did want to talk down the Euro then this would be their best opportunity. Lastly, the expected news on whether a trade deal has been made between the EU and the UK. With the Euro looking like it been relatively overbought in the last week the overall downside risk for the common currency looks a lot larger than any upside potential.