Research

Marius Paun | London, UK | Senior dealer | Thursday, 12^th November 2020

 

As Brexit negotiations appear to be going down to the wire, we thought it was about time to have a look at the euro against the pound sterling.

Where are we now? The EU envoy is currently in London trying to strike a last-minute agreement. Reuters reported ‘the talks are expected to last until the end of the week but there will be no updates this week with Brexit tentatively being on the agenda for the November 18^th meeting between EU ambassadors’. So, unless we see a breakthrough, or conversely talks collapse yet again, there will be no news. Even politicians have had enough of the current stalemate?!!!

Previously both sides indicated that November 15^th is the ‘last moment’ a trade deal can be reached if it is to be ratified by the respective parliaments by the end of the year. So, at the end of this week there is the so-called ‘soft deadline’, but in true UK-EU tradition that deadline is pushed further. The real deadline is now late next week, according to some insiders.

It’s fair to say that neither side is confident a deal could be reached this week. The remaining stumbling issues are fishing, a level playing field which includes state aid, taxes, worker rights and by extension some areas of financial services. Lately, the EU added the energy markets into the mix threatening the UK could lose access to it. Some analysts are speculating that was raising the stake to get some concessions on fisheries. In itself, fishing is rather a small issue so one could understand the view that it represents more of a political issue (a battle for giving up or not part of sovereignty even if it’s a small part just to prove a point) than an economic one.

Chances are talks will continue next week in Brussels. The best-case scenario for the markets is a simple free trade agreement, even if it’s going to take closer to December 1^st. If history is of any guidance, EU leaders can always set up an extraordinary meeting pretty quickly if necessary. At the moment it seems investors are positioning towards a last-minute deal.

The Brexit negotiations might put extra pressure on the UK government to reach an agreement, preferably before President-elect Joe Biden is sworn into office in January. He made it clear that the US-UK relationship would be hurt in case of a no-deal Brexit. He values the Good Friday Agreement that ended the violence in Northern Ireland in 1960s and thinks like EU, a violation of the withdrawal agreement could damage the peace process in the region. Furthermore, Joe Biden was adamant the free trade negotiations between the US and the UK would also stop.

In an alternative scenario, but one seen as less likely, there will be no deal and the two sides will trade on the World Trade Organisation terms from next year. The next few weeks will be crucially important to gauge that scenario. The EU summit on December 10-11 is seen as the last option for the EU officials to agree or not. Beyond that, the last session for ratifying an agreement in the European Parliament is 17^th December. Can anyone see the UK Prime Minister Boris Johnson delaying the decision into next year, Theresa May style, after being elected on exactly the opposite platform?

The pound sterling has strengthened against the euro lately on lingering hopes that finally something will be agreed as we approach year-end. EURGBP dropped from a high of 0.9290 touched on September 11^th to a low of 0.8880 yesterday. It bounced right off that triple bottom trading around 0.8993 at the time of writing.

 

The chart shows a steady downtrend with the short-term moving averages below the long-term one and both pointing downwards. The price is now in between those MA after today’s strong rebound.

On the downside, the bears will be looking for a break back below the next support at 0.8944, followed by 0.8916. That could gather selling momentum for a retest of 0.8880. On the upside, there is plenty of resistance just above 0.900 marks to 0.920. However, the buyers will need to see a close above 0.9045 to think the rebound has legs. That would pretty much be the mid-level between 0.8860-0.9260, the range of price action of the past 6 months.

 

 

 

 

 

Marius Paun | London, UK | Senior dealer | Friday 06^th November 2020

 

The US Election Still Undecided

We had a busy week with plenty of economic data releases and the seemingly never-ending US presidential election results. Nonfarm payrolls numbers were released on Friday showing a rise of 638,000 jobs in October which beat expectations of 600,000. The reading followed September’s increase of 672,000. The unemployment rate fell to 6.9%. The biggest gains were in hardest-hit sectors during the pandemic, leisure and hospitality increased by 271,000 with bars and restaurants accounting for 192,000.

On the US election front, Joe Biden seems to be consolidating his lead now holding 253 electoral votes (needs 270 to win) after he went in front in Georgia going into the weekend and recouping ground in Pennsylvania. It happened because mail-in ballots are largely in his favour but get counted last. It does not look well for the incumbent Donald Trump who threatened to go to the Supreme Court saying he ‘wants all voting to stop’. A Georgia judge has already dismissed the Trump campaign lawsuit. Many will now hope there will be no clashes in the street between sympathisers.

Elsewhere, we had the FOMC meeting where members left interest rates and bonds buying program unchanged, as widely anticipated. They also made no changes to the statement stressing the financial conditions remain accommodative.

China released its October Caixin manufacturing PMI figures showing 53.6 (numbers above 50 indicate expansion territory) versus 52.8 forecast. The report detailed that the output jumped sharply because of the ‘quickest increase in total new work for nearly a decade’. Business confidence reached the strongest level since August 2014 but new export orders are still lagging due to the coronavirus outbreak.

The European Central Bank reported that PEPP – Pandemic Emergency Purchase Programme, a non-standard policy measure initiated in March 2020, is likely to remain the main channel for its monetary intervention. The PEPP is a more flexible tool which helps highly-indebted countries as opposed to the APP – Asset Purchase Programme, which mirrors asset purchases by the size of the individual economies. Meanwhile, Covid infections in Europe show records on a consistent basis with Germany now reaching 20,000 cases daily.

In the UK, Prime Minister Boris Johnson reiterated there is no alternative to lockdown, which started this Thursday, for the next 4 weeks. However, the Times reported that some UK Cabinet members have already warned that the restrictions could extend into the next year if confirmed cases and hospital admissions keep rising. On the other hand, Nigel Farage is to relaunch his famous Brexit Party as an anti-lockdown party called Reform UK. Talk about a man who is adept at spotting opportunities!!!

Bank of England also had its meeting this week and left the benchmark interest rate unchanged at 0.1%. The surprising part was that it raised the Quantitative Easing facility to £875 billion worth of gilts purchases versus £825 billion expected. Furthermore, it added that it stands ready to increase that figure again ‘if market functioning worsens’. Not sounding very confident as the Brexit saga could get even more complicated given possible the US election result!

Stock Markets across the world, but in the US particularly, rose impressively all week, as highlighted in our earlier analysis, with the Dow and S&P index both up over 7% and the Nasdaq rising an even more impressive 9.4% on the week!

Gold prices followed equities higher this week rising sharply from a low of $1873 to $1952 going into the weekend as investors were happy to sell US dollar despite lingering uncertainty regarding the US election. A softer greenback also helped crude oil prices which rebounded from $33.81 to $37.36 on Friday afternoon.