GBPEUR rates rose yesterday after political Editor Nicholas Watt of BBC Newsnight posted the following tweet “Big buzz in the last hour among Tory MPs that the UK is heading towards a Brexit deal with the EU. Eurosceptics being reassured they will be happy,” it said.

The rumour that was circulating among Conservative MPs was that Jacob Rees-Mogg would announce for parliament to sit on Monday 21st and Tuesday 22nd December. Nicholas Watt said, he expected this to happen before any official UK-EU announcement. Brexiteers are being reassured that their concerns over the EU’s demand for a level playing field have been addressed and that the UK has agreed a joint dispute mechanism ensuring the EU cannot unilaterally punish or blanket tariff. Fisheries remain an area of difference, but it would be an epic political failure on all parts if a deal fell through because of fisheries, which carries relatively little economic benefit in either the UK or EU.

However, the pound’s rise was capped as other news stations and reporters were struggling to back up Watt’s claims. “I know Westminster is apparently talking about an imminent Brexit deal but…. I haven’t heard anyone say that among Brussels diplomats,” said Adam Parsons of Sky News.

The Financial Times has reported that betting markets are now putting the chance of a trade deal at more than 70 percent and that Eurosceptic MPs could accept a “rebalancing mechanism” to ensure fair competition in regard to the level playing field demand. A “rebalancing mechanism” would allow either side to call out the other in the event they felt they were being unfairly treated and an independent arbitration panel would allow proportionate punitive sanctions. The FT has also noted that debate in London and Brussels has turned to scrutinization and ratification of the deal. MEPs are concerned that unless a deal is reached in the next few days, they will not have time to properly scrutinize the finer detail. In fact, it is understood MEPs expressed their concerns in a call on Monday to European Commission President Ursula von der Leyen.

Where Next for Pound to Euro?

Where Next for Pound to Euro?

On Tuesday this week, Foreign Exchange Strategist George Cole of Goldman Sachs Investment bank said he expected the pound to euro exchange rate to appreciate by 1.5-2 percent over the coming days (part of which we have now seen) as the UK and EU progressed talks and looked to avoid no-deal. Goldman Sachs maintain the position that a thin FTA (free trade agreement) will be reached before year end although plenty of uncertainty remains, and in a no-deal scenario the bank sees the pound to euro exchange rate falling to 1.04.

However, Goldman Sachs maintain a base forecast of the pound to euro exchange targeting 1.15, particularly as they see the UK well poised to bounce back from the Covid pandemic. The UK’s highly service led economy is likely to benefit the most as vaccinations are rolled out, returning the UK to the top of investors’ minds.

Federal Reserve’s Final Meeting Before Biden Presidency

In the US, the Federal Open Market Committee meet this week and whilst the outlook for 2021 has improved the short-term picture has deteriorated. This has created an issue for Fed Chair Jay Powell who has consistently said the Fed would be prepared to provide continued monetary support by increasing asset purchases if needed. In the Fed’s last meeting before Joe Biden takes office, investors will look for guidance on the timeframe of the current asset purchases, which will likely be linked to sectors of an economic recovery, and if these asset purchases are to be increased. Currently, the Fed buys $120bn of government debt each month.

Markets will also look towards the Fed’s latest economic forecasts. In September, the Fed predicted the US economy would shrink by 3.7 percent this year and rebound 4 percent in 2021, although with positive news on vaccines the Fed may paint a prettier picture for next year, which could in turn increase the possibility of an interest rate hike.

Lastly, this will be Jay Powell’s final pitch to congress that lawmakers must plug the gap if the US economy is to recover. Currently, congress is stuck as it debates what support is needed but it is hoped that a package of between $748-$908 bn can soon be agreed although incoming president Biden is already eyeing up the prospect of further support next year.

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