EU/UK still divided as Sterling drops
The Pound dropped shortly after the markets opened due to the risk of an individual member country vetoing any Brexit deal. As EU sources stated that a deal was imminent Sterling moved sharply higher but the deal failed to materialise and Sterling volatility remained very high. UK Construction PMI strengthened to 54.7 for November, up from 53.1 previously and beating expectations of 52.0. Bank of England Monetary Policy Committee member Saunders reiterated that “it was better to err on the side of too much monetary support rather than too little”. He added that the central bank could cut rates to just below zero and there was still substantial scope to expand bond buying.
The US jobs data release allowed the Pound to break the 1.3500 mark but the gains evaporated after the European close following news that Brexit talks had been suspended.
Over the weekend, Boris Johnson and EU Commission President von der Leyen agreed to restart brexit talks. Reports emerged from the EU side of a breakthrough on fishing, but the reports were denied by the UK. Sterling traded just below 1.3400 against the Dollar with the Euro around 1.1050 and Brexit headlines will generate high volatility. Reports that the government is looking to insert controversial clauses back into the Internal Markets Bill will also add volatility and Sterling confidence starts the week fragile.
US non-farm payrolls increased 245,000 for November after a downwardly-revised 610,000 increase the previous month and below consensus forecasts of 469,000. Manufacturing payrolls increased 27,000 for the month from 33,000 previously with construction jobs also increasing 27,000. There was, however, a renewed decline in retail jobs of 35,000 for the month as coronavirus restrictions undermined activity and the data maintained expectations of an underlying slowdown in the economy.
According to the household survey, the unemployment rate declined to an 8-month low of 6.7% from 6.9% and below market expectations of 6.8%. There was a small decline in the participation rate and there was a reported employment decline in employment of 74,000 following an increase over 2 million the previous month.
The dollar rallied only briefly on the data amid the more cautious risk tone and expectations that there would be further Federal Reserve support for the economy.
The Euro held a firm tone on Friday’s and traded around the 1.2150 mark as the Dollar remained on the defensive amid negative market sentiment.
There was a further correction late in Europe with the Euro settling lower, just above the 1.2115 amid reports that Brexit talks had been suspended. There was no significant change in long Euro positions according to the latest CFTC data with caution however, hovering over sentiment ahead of Thursday’s ECB meeting.
As of writing, the Euro currently trades just over the 1.20 mark against its US counterpart.