14/12 – Going the extra mile

GBP: Progress being made

EUR: Euro still primed for increases

USD: Stimulus plan being put together

Sterling

Another deadline avoided and sterling has pulled higher through the Asian session. Obviously, and as with all things, the staying power of this sterling strength will be determined by movements in the coming days ahead of the only deadline that is comprehensively set in stone; December 31st.

Markets seem to be looking for headlines on the level playing field and fish to get them closer to believing a deal is there to be signed and that will remain the risk heading through the week; a comment, a headline, an outburst.

It feels trite to repeat our expectations but, in the event of a deal, we would expect sterling to pull a few percent higher before startling to give back of some of those gains as we head into the first quarter of 2021. An agreement that there is no deal to be agreed, could see a 7-10% fall in the value of the pound versus the dollar and a 5% fall versus the euro.

Sterling must also watch out for Covid-19 news this week with Wednesday seeing local tier arrangements reviewed. London is expected to be put into the harshest measures – Tier 3 – prompting fears of further job losses.

Euro

Brexit progress, or the lack of a no-deal outcome, has also helped the euro rebound from the falls against the USD it posted towards the end of last week. It looks increasingly clear that the market believes the ECB’s actions last week were not of a strength that gives them cause to start rethinking their reasons to be long the single currency at the moment.

US dollar

Lawmakers in the US are set to unveil a $908bn stimulus package today that, while it has been negotiated by politicians on both sides of the House of Representatives, has a slim chance of being approved. Conversations between both the Treasury Secretary and House Leader Nancy Pelosi suggest that both sides are willing to deal but, as we have seen with Brexit, red lines may not be overcome until the very last second, if at all.

A Fed meeting this week is the major headline for the US dollar with the expectation remaining that a further expansion of monetary stimulus may well be needed in the first half of next year although the economic and pandemic alarm bells are not flashing currently.

We would expect the dollar to maintain its weakening bias through this week with obvious strength found should risk attitudes start to waver once again.

Elsewhere

The extension of the Brexit deadline afforded risk assets across the globe a little more room for upside with Chinese yuan and Indian rupee prices both headling higher overnight too. Should markets key into market belief that vaccine rollouts are just around the corner alongside an impulse of US stimulus then we expect that risk rally to be maintained well into 2021.

Have a great day.

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Jeremy Thomson-Cook

Jeremy Thomson-Cook

Jeremy has over 13 years experience working in the FX industry. As a specialist in political risk mitigation and currency hedging, he regularly advises clients on the day-to-day moves of the markets and the implications of fiscal and monetary policy on international businesses.