GBP: Boris to head to Brussels
EUR: Could continue slide ahead of Thursday’s ECB meeting
USD: Stimulus doubts once again creeping in
The pound suffered a heavy fall yesterday before recovering through the afternoon session as Brexit jitters highlighted just how certain markets are that a deal will eventually be struck. Comments from Boris Johnson that he was prepared to walk away from the talks are nothing new but coming 24 days before the end of the year highlighted that, if nothing is done, then there is little time to continue negotiations.
To that end, Michel Barnier was pretty clear yesterday noting that there is a Eurogroup meeting on Thursday morning and if there is nothing to present to them on Brexit then no-deal preparations must go ahead.
Boris Johnson will meet with Ursula von der Leyen in Brussels today or tomorrow and from that will likely come the decision that we have been waiting for for nearly 5 years; if we leave the EU what will our trading relationship with continent look like?
As we have noted before, our belief is that a skinny deal will be struck and that should be enough to offer sterling gains of a few per cent. A no deal exit really is the worst thing for an economy recovering from a pandemic and we would expect falls in sterling of 7-10% in the days following an agreement that that is how we must begin our new life outside of the European Union.
The slight breakdown in risk attitudes in the past session or two alongside Brexit fears is just taking the shine off the single currency this morning. EURUSD is below 1.21 having spent a lot of yesterday’s session underwater as well. A short-term test of the 1.20 level would not surprise us ahead of the ECB meeting this Thursday
Stimulus conversations are said to have slowed in the US since the weekend and with that, the chances of an agreement on providing the American people a fiscal boost heading into the New Year looks less and less likely.
Expectations of a deal providing $908bn to the US economy have been a driver of the recent weakness in the US dollar, alongside a market pricing in a recovery from the pandemic on the back of a vaccine rollout. Without the stimulus belief there is more than a chance that the USD manages to arrest its decline.
That being said, should other countries or areas (China, the Eurozone, UK, Canada) manage to increase their own fiscal stimulus offerings alongside a vaccine rollout then the dollar would also continue to weaken on slower growth dynamics.
Gains in commodity currencies are slipping as oil and other industrial inputs peel back from their recent highs. While a vaccine is already being rolled out, the increase in cases recently and the wider market reaction show this pandemic still represents a clear risk to wide markets. AUD, NZD and CAD are all lower on the week so far.
Have a great day.