Brexit remains a key sticking point for GBP and a key issue is fisheries, and now, with only a very small time frame remaining the pressure is on both sides to get a deal over the line.
Despite the deadline set for 31st December for a Brexit trade deal to be agreed and implemented, a deal needs to done before this date or there is the risk of chaos on Northern Irish trade come 1st January. There will be checks from 1 January on controlled substances such as alcohol and tobacco, and traders deemed to be a risk will also be asked to submit customs declarations. But it looks as though the majority of checks will be delayed until 1 July and it has been suggested this date could be extended.
If a deal is agreed you could see sterling strengthen, but it may not be the significant gains that many analysts were predicting earlier in negotiations, the market could well react based on the quality of the deal, it will be interesting to see which side is willing to make concessions on key areas.
Commerz bank are predicting GBP/EUR could fall as low as 1.02 if we are looking at a no deal scenario, although this could be considered a tad too pessimistic considering the lowest GBP/EUR has been this year is 1.05 and that was in March at the height of Covid-19 hysteria. It is likely that a no deal scenario has already been largely factored into current exchange rates. GBP/EUR interbank rates now sit at 1.11 and the historic average is 1.33.
The fact that negotiations are continuing can be taken as a positive, Boris has threatened to walk away from talks on several occasions and has stated there will be no further extensions to talks, yet here we are, several extensions later.
Euro sellers may wish to take advantage of rates as they sit considering the current situation. Analysts from HSBC believe that even if the UK is to get a deal the pound could still be in for a very rough 2021.
Dominic Bunning, Head of European FX Research at HSBC said the following:
"We maintain a counter-consensus view on GBP, and expect the currency to weaken from current levels,"
"We doubt that recent GBP resilience can last".
HSBC believes there are two main factors that will hurt the pound. They have the opinion that trade frictions will rise and if a deal is agreed by the end of the year, Britain faces greater costs of doing business with the EU, which is the country's largest trade and investment partner.
"Even with a Free Trade Agreement, increased costs in the form of “non-tariff barriers” will be sizable – by up to 14% based on UK Treasury analysis. A no-deal outcome would see even bigger barriers to doing business. GBP-USD does not appear to be factoring this in given it is trading close to its historic long-term fair value. In our view, the currency is the most likely channel through which an adjustment could be delivered to offset the impact of the greater costs," stated Bunning.
The second key factor HSBC predict will hurt sterling is a faltering economic rebound from the pandemic. The UK economy has been severely impacted by the coronavirus crisis more so than its G10 peers.
"The UK saw the largest negative growth shock in Q2 amongst G10 economies and now faces a slower pace of recovery, in our view. Earlier upside economic surprises already look unsustainable and are rolling over as greater restrictions are imposed on activity. A lack of policy flexibility suggests diminishing government support compared to Q2 and Q3," said Bunning.
It is likely that due to drop in lockdown measures over the Christmas period there is likely to be a spike in Covid numbers which could lead to further lockdown measures in early 2021 which will no doubt impact the UK economy and in turn the value of the pound.
The euro could be set for gains against the US dollar. In times of global economic uncertainty investors seek out safe haven currencies. The US dollar is usually the destination of choice, but the dollars safe haven status is now starting to be questioned due to the handling of the Covid Pandemic.
The US has been hit hard by the pandemic and it looks as though the pandemic is continuing to escalate. Unemployment is significantly up and the US economy is faltering. The Federal Reserve has already pumped billions into the economy, and if further stimulation is required it will do no favours for the US dollar and could result in euro strength.
The Fed meets to set policy on 15th-16th December. It will be interesting to see The Federal Reserve’s next step to combat the economic fall out from the pandemic.
Steven Mnuchin, the treasury secretary will testify on the CARES Act, under which Congress made $2 trillion available to the Treasury in order to assist the economy in the fight against the pandemic. A significant portion of which was aimed to support the Federal Open Market Committee’s (FOMC) lending plans.
Mnuchin only recently said that excess funds would have to be returned by the Fed, so the next steps taken by the Fed could be very interesting news to the markets.
Today we will witness the release of US employment change for the month of November. There is expected to be an increase from October’s 365k to 420k. This does have the potential to cause US dollar weakness.
Later in the day we will hear from John C. Williams who is the president of the Federal Reserve Bank of New York. He serves on the Federal Open Market Committee (FOMC) and as such his words carry weight. With the potential for further cash stimulus from the Federal Reserve investors will be waiting with bated breath to see if Williams will give any hint as to monetary stimulus moving forward. If he does give any indication to further stimulus we could see US dollar weakness.
Today we will also witness the Feds Beige Book reports. Business minds and economists from the 12 Federal Reserve districts gather to provide insight into how they think the US economy will fair moving forward. This has moved markets in the past and this could well be the case today. The pandemic will no doubt feature heavily in discussion and we could see changes in US dollar value due to this.
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