Sterling has enjoyed a steady rise throughout this week, breaching 1.11 against the euro and even 1.30 against the dollar. However, as leaders convened at the EU summit, the mutual message remained clear and for the most part unchanged from the one established at the start of the summer.
Though the bloc is keen to reach an agreement, the EU confirmed they will be “stepping up” no deal preparations and will not be pursuing a deal at all costs. As was the case in August, Europe remain unwilling to compromise on equal trading parameters and arbitration processes.
Clearly the markets are following updates from the summit closely and so further volatility could be expected during today’s trading particularly as PM Johnson is due to make the UK’s response clear.
The most recent report from the Organisation of Economic Coordination and Development pointed to a potential 6.5% contraction in the UK economy should a no deal scenario come to fruition following talks. This report was even shared on the HM Treasury website bringing further credibility to the Paris based think tanks logic.
Revised forecasts of 4.8% growth in 2021, down from 6% in the case where no agreement is met with the EU. Even growth in 2022 is set for contraction down to 2.6% from 2.9%. The EU confirmed this week they would be open to extending the deadline for talks, which might reassure the markets in the short term, however business confidence might suffer amidst the prolonged uncertainty.
The government’s restrictive measures put in play to control the virus are also starting to weigh on investor confidence once more. Consultancy firm EY’s latest report points to considerably slower growth in the months to come despite the fact the economy has expanded by 17% over the course of the last 3 months. This certainly buys into the Bank of England’s line of caution and may well add further speculation around the MPC’s plans for negative interest rates, something that could draw the pound’s value lower on the international stage.
Indeed, EY suggest the UK’s recent growth path has been largely built on an overly inflated appetite within the housing sector and a sharp return in consumer spending since the lifting of lockdown. However, it may take until to the summer of 2023 for the economy to recover to levels seen before COVID.
It will be interesting to see if this forecast is revised further, depending on how the jobs market reacts to the narrowing support scheme laid out by the government, the potential of further restrictive measures and perhaps most importantly another round of stretched out Brexit negotiations.
It could be an interesting end to the week for EUR exchange rates with inflation data due from across the bloc holding the potential to draw added volatility. During the latest ECB meeting inflation levels were raised as an area of contention. Indeed, as a result of the heavy fall in oil prices and as well as a surprising drop within the services sector (1.2% in June, 0.9% in July and 0.7% in august). the European Central Bank are forecasting a moderate but prolonged period of contraction in prices in the months ahead. It will be interesting to see how the markets react if we see a sharper contraction than expected in today’s release.
ECB president Lagarde is due to speak this weekend with another push for Brussels to roll out the support scheme is expected. The speech comes ahead of a week packed with business confidence surveys across the bloc.
The USD could be due further volatility of its own. As has been the way for a number of weeks now, the probability of an agreement over the US coronavirus stimulus deal before the elections has been a key driver for the financial sector, with the currency markets being no exception.
With just 18 days to go, officials have already admitted it is very unlikely the relief program will be rolled out in time. Treasury Secretary Steven Mnuchin pointed to the widening difference of opinion between Democrats and Republicans as an area for concern.
Investor confidence has already started to waiver this week, with European stocks dropping by as much as 2.1% and the S&P 500 by 5.33 points. This month’s pick up in unemployment levels may not be helping this trend either. With claimants jumping to 898,000, might we start to see further fallout for the US economy as we move closer to the elections and uncertainty continues to build? Those in the in market for US dollars might look to plan around today’s retail sales figures in case a surprise here helps weaken the greenback’s grip in the second half of this week.
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