One of the significant macroeconomic issues currently dominating western markets looks as if it’s finally heading for a resolution while another appears set for a further extension.
Pandemic Relief Bill will get agreed according to Democrats
News emanating from USA news wires over the weekend suggested the Pandemic Relief Bill will be agreed in full by the USA Senate on Monday afternoon during the New York trading session. The total amount of The Bill is $908b, and in its entirety, the stimulus should assist the full spectrum of the USA economy; from individuals to quoted firms.
Should the rumours materialise into a deal between Senators, then US equity markets will probably rally during the New York session, a momentum that could continue until the end of the year.
The equity markets gain will probably result in USD losses; stimulus = more US dollars in circulation. This repeated pattern of USD falls occurred after the various stimulus packages both the Fed and US government have put in place since the pandemic hit the domestic economy and financial markets.
USD has come under intense scrutiny over recent weeks, USD/CHF has slumped to 0.889, a low not previously seen since January 2015. The currency pair is down -8.40% year-to-date. The dollar’s dive during 2020 is also illustrated by EUR/USD, up 8.42% year-to-date and trading at highs last seen in May 2018.
The overarching benefit of a plunging dollar has been a more competitive manufacturing sector. However, imports have risen in value, particularly from China. The manufacturing renaissance can’t last because of substances required to manufacture, such as steel, rocket in price when they get imported.
UK and EU engage in a game of chicken as Brexit day approaches
Despite the tub-thumping rhetoric coming from the UK government, including threats to launch gunboats in UK waters to attack French trawlers, the UK government knows it’s the junior partner and will be the ultimate loser when free-trade and free-movement ends.
The UK government keeps missing its self-imposed deadlines, but as it does there’s a date which it can’t avoid without creating havoc in the English nationalist part of the Tory government. January 1 is the date the UK is supposed to divorce itself from the EU. However, that date will most likely get avoided. At the same time, the UK powers devise another face-saving, victim narrative to sell to an unsuspecting public through the medium of their low-brow newspaper publications.
Sterling rallies as markets open Sunday evening
GBP rose sharply on Sunday evening during the Asian session as FX market traders evaluated the decision of the EU and UK to extend talks. GBP/USD rose by over 1%. The velocity of the momentum move in GBP may come under scrutiny when the London session begins at 8 am UK time.
Once analysts and traders have time overnight to fully evaluate the difference an extension makes since the UK is two weeks away from its divorce, the move in sterling versus its main peers might fade.
The UK pound has endured a significant sell-off versus many of its peers during 2020. Mainstream media commentators have been quoting the value of GBP/USD in a lame attempt to suggest that the pound is holding up well during the recent turmoil. But the real comparison as to where the UK pound and economy has gravitated is versus the euro. As of Friday December 11, EUR/GBP is trading up 7.77% in 2020 and close to highs last seen in August 2017. The UK pound has crashed versus AUD, NZD and CHF during 2020 despite all central banks running close on zero interest rate policies.
Many analysts still predict EUR/GBP parity at 100 once the UK finally decouples from the EU. The effect this exchange rate would have on UK commerce is enormous.
Irrespective of tariffs such an exchange rate would make goods imported close on 10% more expensive than current prices. The UK imports 51% of its goods from the EU; therefore, no amount of chest-beating can alter the fact that it’s always been the subservient partner and will suffer most. There is a noticeable lack of medium to high impact calendar events on the economic calendar on Monday, December 13, which allows traders to concentrate on the ongoing Senate vote and Brexit developments exclusively.