Sterling rates have surprised many over the last week. Following news of the Brexit deal being agreed many had expected the pounds value to climb sharply. This was not seen with only a nominal positive climb before the Christmas break on the news. The reason behind this ranges from; potentially lower liquidity levels in this Christmas to New Year period when most trading firms are on Christmas break, the fact that the Brexit deal is perhaps not as comprehensive as expected, or indeed that it had potentially simply been factored into sterling’s value in the build-up.
Yesterday afternoon MP’s backed the post-Brexit deal with 521 voting for and just 73 against, meaning the Brexit deal of more than 1,250 pages will be put into law as of New Year’s Day. There does however remain many questions left unanswered about what the trading agreement will look like. These questions include the topic of VAT for businesses with exposure in different countries, to the finance sector passporting long term, and that in the paperwork a ‘partnership council’ is mentioned over 170 times. This being the body that will decide the details on future disputes, hinting at further negotiations in the future.
Brexit experts from the Tony Blair Institute and associates at the Institute for Government have both commented on the deal being so ‘legally dense’ that business ‘will need to know real practical measures’ before the full impact on the UK economic impact going forward could be forecasted. Boris Johnson is also now referring to the period between now and 2026 as the ‘transition period’, this being the third ‘transition period’ we’ve had since 2016, again not suggesting this deal is the final solution. In either case many expect the politicians on both sides of the channel to continue to position the deal as a success.
Next week as we enter the New Year a host of economic data is released once more which could impact sterling’s value. This includes Manufacturing PMI data and mortgage approvals on Monday, Service PMI on Wednesday, Construction PMI on Thursday, and further housing data on Friday from the Halifax. Only recently UK House prices have been reportable climbing up 7.5% in for the year according to the Nationwide building society.
This last week most focus out of Europe has been commentary following the Brexit deal just before the Christmas break with all European member states now agreeing to the proposed deal. Prior to that however they had agreed on their next 7-year budget. This was widely seen as a breakthrough as they signed off a €1.8 trillion budget and coronavirus recovery package.
It had been delayed for a few weeks prior due to disputes from both Poland and Hungary which opposing mechanisms in the budget with conditions on some funds that to gain access ‘core European values’ would need to be met. They stated it was ‘political blackmail’ suggesting that they must abide by central policy on rule of law and values rather than have judicial independence.
Moving into next week and 2021 economic data will continue to drive the single currencies value, keenly looking at the speed of recovery across the block. Next week there is a series of PMI data released with retail figures on Thursday potentially holding the most weight over the euros direction. Retail figures are expected to have dropped by as much as 3% in November due to lockdowns. Unemployment data is also released on Friday.
Politically through the year ahead most expect the internal battles between member states to continue an undertone of concern. The real difference in economic growth between North and South also remains, along with the potential dipropionate support given from the European Central Bank to member states.
GBPUSD rates yesterday, after the US support bill and Brexit approval recently, has now reached a multi-year High.
US news has equally been around the latest Covid relief bill recently passing. This for a staggering $700 billion with $600 going to eligible adults across the US. The document consisting of over 5,600 pages, also raised some other questions about spending directions, but equally included $16 billion support for the airline industry, $10 billion for highways and many other infrastructure investments.
Going into 2021 Joe Biden will be taking office in the White House on the 20th January so future policy decisions could easily weigh on the value of the USD going forward. The recently voted through relief bill did just that, with risk appetite globally growing. This resulted in a sell off from the USD making it cheaper to buy as investors were happier to take on more riskier investments.
2020 has been quite a year, from everyone adapting to the outbreak of Covid-19 back in March, with lockdowns across Europe and the wider world, travel restrictions, embracing virtual meetings, emigrating to remote signings for business transactions, all the way to the recent constraints with borders closures, plus all with a backdrop of Brexit uncertainty, 2020 has been quite a year!
Saying that economically 2020 is ending with 93% of economies across the world having contracted, and with global stock markets at a all time high. The reason may well be the amount of stimulus which is being injected by central banks. The numbers are huge, globally this is now forecasted to be over $1.2 billion per hour. In the US the Fed’s balance sheet recently hit is biggest one-week increase since May, climbing by nearly $120 billion in a single week. In the UK, the Bank of England has this year added nearly 5 times as much to its debt levels as they did in the 2008 crash. This all being government bonds which are in essence future tax returns, something to think about as we finish the year…
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