Monex: GBP higher due to Brexit optimism, EUR doesn't suffer from expected lockdowns

14 december 2020

The pound sterling has risen because of Brexit optimism. The euro does not suffer from announcements of tighter lockdowns in the euro area. Below is a short commentary by Ranko Berich, Head of Research at Monex Europe, on the US dollar, the euro and the British pound.

GBP
Sterling has yet again taken all of the focus in FX markets today as it popped a percentage point higher as Wellington opened markets late Sunday evening, with the rally continuing into the European open this morning. Sunday’s hard deadline didn’t look to be much of a game-changer for Brexit negotiations as a deal still remains in limbo while both parties stress the likelihood of a no-deal exit, but the fact that a no-deal scenario wasn’t confirmed as the ultimate endpoint for markets after Sunday’s meeting highlights the fact that both sides are still striving to reach a narrow trade deal - which remains our base-case outlook. Positive sentiment around Brexit talks was boosted too by reports in the Telegraph newspaper this morning. The article said the EU is ready to drop its demand to impose immediate “lightning tariffs” if it unilaterally deems the terms of any trade agreement are breached in the post-Brexit relationship. This again confirms the willingness by both sides to back down on key demands in order to achieve a deal and highlights goodwill in negotiations if true. The news on lightning tariffs comes at an apt time for the UK as government officials work on a new stimulus package of around £10bn to shelter the hardest hit industries such as agriculture and autos. The package in itself could conflict with level playing field rules - a key sticking point in negotiations - hence the relevance of the Telegraph report. With sterling trading 1.3% higher this morning at the time of writing on narrow deal optimism, Brexit headlines are going to remain pivotal for FX markets this week. This is especially the case with the Bank of England set to release its latest policy decision on Thursday. Any concrete Brexit news confirmed by both sides could swing the BoE’s decision in discussing negative interest rates, however headlines are unlikely to move the needle for the central bank. 

EUR
After what has been a tumultuous week for EURUSD, the pair closed largely flat on the week on Friday before enjoying a boost this morning. With the EU budget and recovery fund impasse now being out of the way, and the European Central Bank ramping up stimulus by another €500bn, the euro seems to be shielded from any negative news that came out over the weekend. German Chancellor Angela Merkel Ordered Germany into a hard lockdown as infections soared, with schools and non-essential stores being closed starting this Wednesday. In the Netherlands, political leaders held an emergency meeting on Sunday and plan to hold an additional press conference on Tuesday to address the nation, possibly with new containment measures to come.  Eurozone, French and German Purchasing Managers’ Index figures are set to be the main eye-catcher of the week and are scheduled for release on Wednesday. For today, the currency is likely to take cues from Brexit related headlines and changes in risk sentiment.

USD
The US dollar opened the week in the red against the entire G10 currency board as US lawmakers will likely unveil a $908bn relief bill today, although there is no assurance the bill will get through Congress, according to Senator Joe Manchin. The bipartisan group will present two measures: one with $748bn in spending, which contains funds for small businesses, vaccine distribution and liability protections, while the other of $160bn includes funds for state and local governments. US Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi will continue talks today after having indicated they don’t want to work through the holidays. This week, the US will roll out the Pfizer vaccine nationally after the FDA approved the vaccine on Friday. Hurdles to distribution and population uptake remain as the focus sits on Whitehouse authorities to take the vaccination live on air in order to persuade the public of its efficacy and legitimacy, however, the news has helped buoy risk sentiment today in markets and will likely prompt fresh optimism from the Federal Reserve. On Wednesday evening at 19:00 GMT, The FOMC will come out with fresh projections at its policy meeting after improving vaccination progress has underpinned the outlook for the safe-haven dollar since the last couple of months. The meeting will therefore see policymakers take stock of the improved medium term growth outlook while also reflecting upon any further short-term policy actions as virus numbers have been increasing again lately. As a result of the resurgence in virus cases, New York is stopping indoor dining today while California is raising alarm on the rising deaths, keeping the option of further restrictions open.