Leaders agree to announce final decision by Sunday

Boris Johnson and Ursula von der Leyen were unable to bridge the considerable gaps which remain between the two sides’ positions over a post-Brexit trade deal following a meeting in Brussels last evening.

Delivering the downbeat news, a spokesman for Johnson confirmed that talks between Barnier and Frost will resume later today. The only agreement that was reached is that a firm decision will be made by this Sunday.

Nothing appears to have materially changed over the three major sticking points, and the chances that the transition period will end on December 31st with no trade deal in place have increased significantly.

With both sides’ economies in tatters following the Coronavirus Pandemic it was hoped that there could be compromise over fishing rights, competition rules and how the future relationship will be governed.

In the end it appears that the UK sees sovereignty over its waters as fundamental, while one of the main reasons that Brexit will happen is that the country wants to escape the bureaucracy with which Brussels attempts to create a level playing field across the entire region.

In truth, going right back to the UK’s accession to the group and later its decision not to join the single currency, there has always been a degree of antipathy between London and Brussels so in the end there will be a parting of the ways.

Irrespective of the Brexit outcome, the UK economy is expected to bounce back next year as the programme of vaccinations gains pace. It is far from certain that it will be the overall panacea that many hope for, and it is entirely possible that many businesses particularly in the retail and hospitality sectors simply won’t survive.

The concerns expressed in the large urban areas of the north around Manchester and Liverpool that they have been singled out may soon be evened out with a real possibility when the first review of the tier system takes place next week, that London will be placed in the top tier. Were that to happen it would be a major setback.

Yesterday and overnight, the pound reacted to the gloomy news from Brussels.

While traders still see the possibility of a Brexit deal, they appear reticent to forsake their long positions built up over several weeks since the break through the 1.30 level. Sterling is currently (0530 GMT) trading at 1.3367 versus the dollar and has also fallen versus the euro to trade between 1.1050 and 1.1020.

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Support plus Vaccine to drive recovery

Under the Trump administration, there always appeared to be a reticence to provide a significant second package of support for those whose jobs and livelihoods have been affected by the Pandemic.

That feeling was counterbalanced by the beliefs of Democrat members of both Houses who fought for the support to be agreed.

Now that there is a Democrat Administration about to be sworn in, the position has been turned on its head.

The Administration will now favour a large-scale stimulus package while the Opposition in Congress and the Senate will come from Republicans who are certain to label Biden’s teams’ proposals both over-generous and potentially crippling.

That view runs counter to the view of the Federal Reserve which is a neutral player in the drama. The Central Bank, without doubt, leans towards the Democrats view that a package of measures will be far from crippling and will provide a shot in the arm that the economy has been crying out for.

Today’s data for jobless claims could be pivotal for the view of how the economy will perform in the short term. There is a growing concern that existing jobs are continuing to disappear while job creation is also slowing.

The two together will affect consumer confidence, retail sales and output which could set the economy back and extend the period until it reaches pre-Pandemic levels.

Just how far negotiations have got is also open to interpretation. Republicans say they have a package of measures ready to go, while Democrats consider what has been announced so far as little more than a basis for further discussion.

Meanwhile, the time is approaching when the dollar will be decoupled from its role as a measure of risk appetite. That has been entirely appropriate while developed economies were all suffering from the Pandemic and heading in the same direction.

However, as the recovery begins and economies grow at a vastly different pace, the FX market will begin to react to those various drivers and be more reflective of the economic reality.

Yesterday, the dollar index rose to a level just shy of the first level of resistance at 91.20 and closed at 91.03.

Further stimulus to find the right beneficiary?

Christine Lagarde may have found the perfect time and opportunity to start a depreciation of the single currency.

In the recent past, she has voiced her concern over the effect a stronger euro would have on inflation, although she has taken no further action.

Over the past few days following a surge to long term highs, the euro has begun to lose ground. This is most likely to be in response to the release of an effective vaccine. It is seen as a positive for the Eurozone although there are several other issues that the region faces.

At today’s ECB meeting, it is as close to certain as these things can be, that an increase of up to Eur 500 billion in the Central Bank’s bond purchases will be announced to provide further monetary support to the economy. This is despite fiscal support continuing to be delayed by matters that have no part of the Pandemic or its fallout.

Ms. Lagarde will now get more bang for her buck as she tries to talk the euro further down and hopefully through major support levels. Were she to succeed in devaluing the currency it would go some way to seeing inflation rise, but the trick would be to retain control should prices start to rise rapidly.

The oil price has been a major constituent in the falls in inflation that have been seen recently across the G7, as have lower interest costs.

With the vaccine being rolled out and commerce beginning to see a light at the end of the tunnel, the price of oil and other commodities that have been subdued could create another problem for the ECB.

It has already said that it will not attempt to have its mandate changed to switch to a more flexible inflation policy, while interest rates will need to be subdued for some time to come.

This will be the most significant meeting Lagarde has presided over in her relatively short tenure and its outcome could resonate for some time.

Yesterday, the euro fell to a low of 1.2058, although it recovered a little, closing around 1.2080. Time will tell if this is the medium-term turnaround that has been expected for some time. Any approach on the 1.20 level will be keenly observed since it will have the same psychological value as it had on the way up.