Talks to continue but same issues remain

The EU and UK representatives negotiating a post-Brexit trade deal have been told by their respective leaders to continue talking despite the comments made by both sides at the end of last week that agreement is unlikely to be achieved.

With the UK’s transition period ending on December 31st, it is hard to imagine the three remaining issues being resolved. Despite the deeply rooted intransigence of both sides, they both now understand that a deal is preferable but the rhetoric about being prepared to walk away remains.

In a joint statement released yesterday, Johnson and von der Leyen did not say how long talks would continue for but there seems to be a growing realisation of what no deal actually means even at this late stage, and a desperation to get an agreement is growing.

The Pound has rallied overnight as traders optimism in a deal being done was renewed.

This week the Bank of England’s Monetary Policy Committee will meet. It is expected that the talk of lowering interest rates into negative territory will continue but it is unlikely that a decision will be made this time around. The Bank will need to be careful not to let a further cut in rates be seen by the market as an act of desperation.

Investors want to see Central Banks as being in control of their decisions and due consideration of all options breeds confidence.

Brexit continues to dominate the headlines although concerns over the effectiveness of the Government’s tier system to gain control of the Coronavirus Pandemic is being questioned.

This Wednesday, the first review of the tiers will be made and there is a real possibility that London will be moved into tier three. There are doubts whether the entire City will be affected but given the manner that the restrictions have been implemented, that is the most likely course of action.

Last week, the pound fell as hopes of a trade deal faded. It reached a low of 1.3134. Overnight, it has rallied following yesterday’s announcement and has so far reached a high of 1.3367.

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Fed beginning to feel isolated as cases continue to rise

Jerome Powell is very likely to announce more monetary stimulus for the economy when he presides over a press conference following this week’s FOMC.

While the stimulus may not be made available immediately, considerable advance guidance will be given as to the size and duration of the program.

With a little over a month to go until President elect Biden will be inaugurated, Lame Duck President Trump may be inching closer to conceding since his apparent final throw of the dice, appealing to the Supreme Court, has been rejected.

Data for Industrial Production and Capacity Utilization will be released tomorrow with output expected to fall due to the increase in cases of Covid0-19 over the past few weeks. The FOMC is sure to discuss the delay in providing fiscal support. Powell will probably be even less guarded in his words that he has been in recent speeches.

There is a lot of scope remaining for volatility in the currency market even though this will be, in essence, the final full week of the year.

The Pandemic and its effects have brought several items of data to the fore that have not had much influence in the past. For example, tomorrow’s Redbook provides an accurate read on the retail sales data which will be released on Wednesday.The Beige Book has also come to prominence, giving an advance read on the Fed’s view of the economy.

The latest release of the Beige book will be confirmed on Wednesday when the Fed’s latest forecast for the economy will be released. This has the potential to provide the dollar with a boost since it is unlikely to hold any positive indication without an announcement from Congress regarding support, hurting risk appetite.

Finally, the weekly employment data has taken away some of the interest traders show in the NFP. The most recent data has turned for the worse, with weekly claims increasing and the four-week average also heading higher.

Last week, the dollar index managed to hold at lower levels. It is likely that it will start to climb as vaccinations begin in the U.S. and the Biden Administration starts to get to grips with economic support.

It traded between 91.04 and 90.61, closing at 90.95.

ECB purchases driving calls for debt forgiveness

The ECB now owns an incredible level of Eurozone Government debt. It is currently buying around Eur130 billion per month and with four nations; Greece, Italy, France, and Belgium having debt to GDP ratios in excess of 100% it is difficult when that debt is going to be paid down until the Euro\one economy is back firing on all cylinders.

That is going to take several years and the subject of either making the debt owned by the ECB perpetual, or being forgiven entirely by the Central Bank is refusing to go away.

The ECB remains the economy’s only supporter at the moment as the dispute within the EU Commission over the budget and economic support remains in stalemate.

The EU is trailing behind the several countries that have so far approved the use of the Pfizer/Biontech vaccine for general use. That is likely to delay the recovery further while two other issues have emerged. Brexit continues to be a concern, while the reaction to rising cases of Coronavirus is raising worries over increasing lockdowns

There has been a degree of infighting in Brussels over a few nations who have been in contact with the UK Government about so-called side deals if no trade deal is agreed. Those nations are said to include Germany although Angela MerkeL and her very good friend EU Commission President Ursula von der Leyen continue to play hard ball.

The Commission has not minced its words, insisting that Michel Barnier remains the Chief Negotiator and no other Official has any right to discuss trade terms.

The other issue is that Germany will be in lockdown over Christmas, having announced another full lockdown between December 16th and January10th. It has been usual over the entire Pandemic that what Germany instigates, the rest of the EU/Eurozone also adopts.

Last week, the euro struggled to maintain its recent rise but appears to have a fair amount of support close to 1.2000 versus the dollar.

It fell to a low of 1.2105, closing still under pressure at 1.2117.