BoE advises banks to prepare for no deal

The European Union has accused the UK negotiators of being inflexible in negotiating a trade deal between the two. The deal would serve as the basis for a future relationship one Brexit takes place on December 31st.

There have been rumours for a considerable time that the negotiations are not running smoothly but the advent of Coronavirus has led to them taking second place for the time being.

As both Europe and the UK emerge from the pandemic, albeit at different paces, neither side will want Brexit to stand in the way of the economic recovery which will follow on from bringing the virus under control.

There have been stories emerging of a more flexible stance being taken by the UK team despite the accusations of intractability.

The pound’s recent advance has been mostly due to a weakening of the dollar but there may have been a minor element of optimism growing that cooperation would be a by-product of both nation’s determination to concentrate their efforts on recovering from the economic downturn being attributed to the virus.

Yesterday, the pound rallied further, reaching a high of 1.2615 versus the dollar, closing at 1.2585. It is reaching very close to an unsustainable overbought condition, despite the pressure being exerted on short positions. The data from the CBOT which will be released on Friday will make interesting reading should the pound close near to its present level. That may be a big ask considering the drivers that will be released over the next two days.

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Jobless claims to drive dollar

With the amount of domestic turmoil that is prevalent in the U.S. right now, it is hardly surprising that the hoped for bottoming out of the economy is yet to happen.

The U.S. seems to be falling behind the rest of the developed world in seeing its economy start to see light at the end of the tunnel.

With riots affecting several States following the murder of a suspect by a policeman in Minnesota, and protests taking place over the lockdown restrictions this week’s employment data, starting today with weekly jobless claims may refocus market attention.

Following two weeks at the start of the U.S. lockdown where jobless claims surprised the entire nation, the next eight reports have each improved over the last. Today’s is expected to be below two million new claims filed. While that would have been unthinkable at the start of the year, it will be considered as something of a triumph.

Today’s data will be followed tomorrow by the monthly employment report. The importance of this dataset had been waning recently but since Covid-19, it has gained its old significance as the most recognisable data for the man in the street to understand the state of the economy.

Market expectations are for between 7.5. Mio and 10 mio jobs being lost in May.

There has been something of a glib reaction to the dollar’s recent fall, putting it down to the rise in risk appetite globally and the reduction of the dollar’s value as a safe haven currency. Studying the most recent price action, it is more likely that it has been driven by concerns over the bounce back of the economy.

Yesterday, the dollar index fell to a low of 97.18, closing at 97.26. That is its lowest level since March 12th and is close to the level at which its most recent rally began. A fall below the 96.60/50 level may see what is still considered a correction turn into a trend.

ECB to drive euro performance

As has been seen globally as the covid-19 pandemic has decimated economic output, unemployment has continued to rise across the Eurozone.

Employment had been growing in a seven-year trend before the pandemic hit, and it could take another seven years before it reaches the level of last December again.

In April, before the pandemic had truly hit, employment in the EU was at a twelve-year high. When comparing the EU to the Eurozone, the unemployment rate inside the Eurozone is climbing faster than compared to the nations who do not use the single currency and the restrictions that go with it.

That may be surprising since it has always been assumed that membership of the Eurozone brought added economic benefits. However, as has been realised over that past few years, the contributions that have been needed to sustain the Eurozone’s coffers, have denuded their ability to fight off financial viruses.

The rise in unemployment in the Eurozone while worrying is dwarfed by the rise in the U.S. This is held up as a testament to the effectiveness of the furlough schemes that have been introduced but there is a growing confidence in the U.S. that their employment curve in recovery may be V-shaped while the Eurozone takes far longer to create sufficient growth to see employment bounce back.

Today’s ECB meeting is something of a mystery. There is a definite feeling that Christine Lagarde may pull a rabbit from the hat, but if she doesn’t it is hard to see the euro’s recent rally continue.

Yesterday it reached 1.1251 and closed at 1.1245. The next significant resistance is around 1.1354 and if it is going to happen it is likely to be in the next few days.