An extension of euro's rally (Daily analysis 3.12.2020)

The initial US dollar bounce and a corrective move that lowered the S&P500 from its highs faded as hopes for a fiscal deal have reemerged. The common currency outperforms while the pound sterling was hit hard by a string of negative headlines on Brexit.

The EUR/USD pair continues to rally after breaching the 1.20 mark. The main currency pair has so far moved above 1.21 to trade at the highest levels since April 2018. Fresh buyers have emerged and flock to buy euro after the upper limit of the 1.16-1.20 range was broken earlier this week. The next target could be the 1.24-25 area, yet the European Central Bank's reluctance to allow for further appreciation may make it very difficult.

Brexit nervousness takes over

The pound sterling is the worst performing G-10 currency. The cable (the GBP/USD) has recovered the majority of its drop towards 1.33 due to a continuation of the US dollar selling. However, the EUR/GBP pair soared towards 0.91 in the biggest jump in a month. The pair now trades over 2% above the late-November lows coming at 0.8866. The recent weakness should turn out to be only temporary in the case of a Brexit deal, which remains a central scenario despite a string of negative Brexit headlines. The latter are to blame for the pound's shift lower. The noise continues as diplomatic sources revive hopes for a deal this week saying an agreement is almost there.

A busy day ahead

On Thursday continuation of the EU- UK trade deal negotiations will remain in the limelight, but market participants will get plenty of information to reflect over. Datawise, we get services and Composite PMIs from all over Europe, US initial jobless claims and ISM services index. A postponed OPEC + meeting and decision on delaying an output hike for three months are eagerly expected as well. Such an outcome might be not enough to push oil benchmarks significantly higher in a sustainable move.

Another round of headlines of the much-needed US fiscal stimulus is expected as well. House Leader Nancy Pelosi voiced support for the USD908 bn bipartisan spending package, while Republican Senate leader Mitch McConnell has allegedly agreed on the need for a near term fiscal stimulus. Both sides allude to a weekend deal, but such a U-turn to end a multi-month gridlock looks too good to be true.

Conotoxia research team