No Deal Expectations Hammering Sterling
Sterling was unable to gain any support from even with expectations of a GDP contraction for the fourth quarter. The latest NIESR data estimated that the economy contracted 9.3% for November before a 9.7% rebound for December with 1.5% contraction for the fourth quarter as a whole
Sterling sentiment remains negative following Wednesday’s meeting between Prime Minister Johnson and EU Commission President von der Leyen. Markets are increasingly cautious over the risk of a no trade deal by the end of December as the EU published details of contingency plans which would ensure road and air links between the UK and EU remain unaffected. Sterling declined to lows just below 1.3250 against the Dollar and to 1.0940 against the Euro with implied volatilities at fresh 8-month highs.
After the European close, Prime Minister Johnson warned that there is a strong possibility that the UK won’t agree a deal and will trade on Australia-style terms. Sterling sentiment remains weak with further volatility expected today on position adjustment ahead of key events and continued Brexit talks over the weekend.
US initial jobless claims increased to 853,000 in the latest from a revised 716,000 previously and well above consensus forecasts of 725,000. This was the highest level for 11 weeks which increased concerns over a slowdown in the labour market, although the data may have been distorted to some extent by the Thanksgiving holiday.
An advisory panel to the U.S. Food and Drug Administration on Thursday recommended approval of Pfizer (NYSE:PFE)’s Covid-19 vaccine for emergency use, paving the way for vaccinations to get underway in America, potentially as soon as next week.
This comes as Covid-19 cases spike in the U.S., recording daily records for new infections and deaths. The surge has hit business across the country, pushing initial jobless claims to their highest level since September, pointing to the economic damage caused by this surge in cases.
The ECB made no changes to interest rates at the latest policy meeting with the rate unchanged at 0.0% and in line with market expectations. The ECB did announce that the PEPP bond-buying programme would be increased by a further 500bn Euros with the scheme extended a further nine months until March 2022. The bank also announced that there will be another round of cheap TLTRO loans for the banks.
Bank President Christine Lagarde stated that the decision on bond purchases was nearly unanimous and that the full amount of bond purchases would not necessarily be used whilst also confirming the central bank raised its 2022 GDP growth projections to 4.2% while inflation is set to remain below the target through the next three years.
There was no major change in rhetoric on the Euro with a firm stance confirming that the bank will not directly target the exchange rate, but moves in the currency, play an important role for price developments. With the measures close to expectations and an element of optimism over the outlook, the Euro gained net support.
There was also an additional boost for the single currency by confirmation at the EU Summit that a budget agreement with Hungary and Poland had been agreed. This will allow release of EU recovery funds and underpin the 2021 growth outlook. The Euro maintained a strong tone despite fresh concerns over the short-term coronavirus outlook as new cases in Germany hit a fresh record high.
As of writing, the Euro currently trades around the 1.2130 mark against its US counterpart.
Data to watch
09:30 – GBP – BOE Gov Bailey Speaks
All Day – EUR – EU Economic Summit
14:30 – USD – Core PPI
14:30 – USD – PPI