Sterling pauses for breath

In a few days’ time, the UK will embark on a new period in its history, free from the bureaucratic morass of the EU and able to make its own laws and trade agreements.

The agreement that was reached on Christmas Eve is historic and gives both sides a degree of what they want but it has not yet led to the rally for the pound that the markets expected would happen once a deal had been agreed.

That is most likely because the jury is still out on the benefit the UK will receive from its independence and the position is in any event clouded by the continuing growth of the new strain of Covid-19.

Prime Minister Boris Johnson has an opportunity now to start to plan what he will do with the UK’s apparent freedom. He has promised to begin the levelling up of opportunity and new projects together with infrastructure growth which will be spread more evenly.

One of the positive outcomes of the deal with Brussels is that state aid can now be provided to regions without interference. The negotiations over fishing rights were long and a potential deal breaker.

In the end, EU fleets can fish in UK waters but catch less fish for the next 5½ years then the UK will be able to decide what happens next. However, if they ban EU boats, Brussels will simply slap a tariff on UK exports of fish to the continent. That seems a fairly simple outcome for such a long and tedious negotiation.

The pound closed at 1.3559 on Christmas Eve and has stalled since due to a thin market and a heavy overbought position. This week is unlikely to see too much change and any Post-Brexit rally will await the return of liquidity next week.

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Market awaits Yellen’s arrival

Donald Trump, in one of his final acts as President, managed to cause a stir by refusing to sign the Covid Relief Bill that was finally agreed between Democrats and Republicans last week. Then in a complete 180-degree reversal signed anyway allowing relief to those whose benefits run out this week.

No real explanation has been given for his actions other than speculation that he wanted to flex his muscles one last time before he returns to being a private citizen.

There was some discussion about the fact that the Bill was insufficiently targeted, and that Trump wanted the $600 direct payment to be increased to $2,000.

In the end, some relief will be forthcoming, and Congress will continue to both oversee the relief effort and add more should it become necessary.

The agreement will have pleased the Fed Chairman. Jerome Powell had been hectoring Congress at almost every opportunity to step up to the plate.

The positivity generated by the Relief Bill together with the news of vaccinations commencing gave a boost to risk appetite which saw the dollar index fall to a 2½ year low.

It reached a low of 90.01, closing at 90.32. The fall may slow as cases of the new strain of Coronavirus grow globally but for now the dollar remains on the back foot.

The arrival of Janet Yellen as President-elect Joe Biden’s Treasury Secretary is eagerly awaited by the markets. The rumour that she is under pressure to consider the return of a strong dollar policy may also provide the dollar with some downside protection.

Systemic issues to cloud recovery

The Eurozone may very well emerge relatively unscathed from the Coronavirus Pandemic as vaccinations begin although the delay in the Relief Bill and the growth of the new strain may add a few months to the initial recovery period.

Looking back on the history of the EU, it seems to survive due to the will of those committed to its nominal success rather that any obvious or tangible benefit, other than protected trade, for its members.

In a few weeks’ time, one of Brussels’ great supporters, Angela Merkel, the German Chancellor will step down. She will leave a gaping void that will be difficult to fill. She has managed to place a German in charge in Brussels and overall, Ursula von der Leyen has done a highly professional job so far.

However, the entire position of stumbling from crisis to crisis only weakens the ability of the Union to perform on the world stage and with Merkel’s departure it stands at a crossroads.

There is now a pressing need to decide just what the future holds and try to shape it rather than let history take its own course.

There is no doubt that the departure of the UK is a blow on many fronts but rumours that French President Emmanuel Macron wants to drive the region forward but is unsure how much support he even has at home let alone the entire region.

The continuing strength of the euro is beginning to damage the economy. Inflation continues to struggle to even break out of negative territory while EU exports are becoming expensive. The ECB will start to face the issues faced by the Bank of Japan for several decades where it cannot influence either the currency or inflation and the economy is unable to grow.

The euro continues to benefit from dollar weakness. Last week, it closed at 1.2185 having risen to a high of 1.2257. The slight fall being seen mostly against Sterling as an outcome of the Brexit trade agreement.