Sterling Moves Higher as UK Compromises on Fisheries
Sterling started the week under heavy selling pressure as the UK faced further fears over coronavirus developments and travel bans. A drop in equities markets also undermined support as markets feared further damage to the UK economy. The Pound declined sharply to 10-day lows below 1.3200 while the Euro strengthened to 1.0870. The CBI retail sales index recovered to -3 for December from -25 previously, just shy of consensus forecasts of zero. Retailers were notably more pessimistic over the outlook for January and transport difficulties will be a further negative.
Sterling managed to claw back some ground as risk appetite stabilised and there were hopes that UK-French transport would resume. After the European markets the Pound bolted following reports that Boris Johnson had made a fresh offer on fish in an attempt to break the deadlock. Reports suggested that the UK would offer 66% of catches to the EU compared with the EU offer of 25%. There were also reports that the UK and France have agreed a plan to resume freight operations between the UK and France.
Sterling pushed to highs above 1.3450 on the Dollar before fading again and back above 1.0990 on the Euro. UK Q3 GDP was revised to 16.0% from 15.5% previously, but the government borrowing requirement was larger than expected and the current account deficit widened. The Pound ticked higher after the data to trade around 1.3400 against the US Dollar with trade developments crucial today.
The Chicago Federal Reserve national activity index declined to 0.27 for November from a revised 1.01 previously. There was a slowdown in all four components and the personal consumption index dipped into negative territory for the month. Underlying dollar sentiment remained weak, but markets remained wary over market positioning and the risk of short covering.
Markets continued to monitor the US stimulus developments with congressional voting on the coronavirus support package. The House and Senate both voted in favour and the Bill will go to President Trump for his signature. Markets will also monitor the Georgia Senate elections for early January given the importance for medium-term fiscal policy. Although there was relief that the legislation had been approved, equity markets were unable to make headway, especially with markets also wary over near-term virus developments and the new strain which is liable to spread globally.
Liquidity will tend to fade over the next few days with a significant element of position squaring ahead of the Christmas period and this will increase the risk of further erratic currency moves.
There was very choppy trading in early Europe on Monday with high volatility across all asset classes. Risk appetite dipped and the Euro dipped sharply as the dollar rallied and commodity currencies were subjected to a sharp correction.
According to flash data, euro-zone consumer confidence recovered to -13.9 for December from -17.6 the previous month and above consensus forecasts of -16.8.
Commodity currencies secured fresh buying and the Euro moved back above 1.2200 with a peak near 1.2250
Liquidity will tend to fade over the next few sessions with a significant element of position squaring ahead of the Christmas period and this will increase the risk of further erratic currency moves. Choppy trading continued on Tuesday with the euro retreating to the 1.2215 area amid a fresh setback for commodity currencies.
Data To Watch
14:30 – USD – Final GDP