The pound tumbles as the time for a deal is running out (Daily analysis 7.12.2020)

A new week starts in a corrective mood. The US dollar edges higher from multi-year lows. The pound sterling depreciates as the weekend brought no breakthrough in the UK – EU talks. Equities drift lower after Wall Street hit record highs on Friday and commodities trade in the red.

The impact of headlines on the US considering sanctions on various China officials over recent developments in Hong Kong has been balanced by excellent news from China, where exports rose over 20% year on year in November. This also points to a resilience of the global economy, which has been struggling with the burden of the second wave of COVID-19 infections and restrictions imposed by the governments.

The sterling slips, the greenback bounces

Brexit news and rumours remain in the limelight as the time to strike a trade deal is quickly running out. On Monday, EU’s Chief Negotiator, Michel Barnier warned that the fishery remains an unsolved issue and other sources claim the talks can go either way. What is more, UK officials threatened to exit the negotiations in case of no progress on Monday. A negative newsflow resulted in a knee-jerk reaction and sent the pound sharply lower. The cable (the GBP/USD) dropped to 1.3250 to trade at the lowest levels since 20th November, and the EUR/GBP pair skyrocketed to a multi-week high of 0.9140. The British currency is set to remain unstable, but a trade deal is still a central scenario for the markets.

Markets will monitor vaccine progress, and the focus stays on the US fiscal package as well. Despite developments on both fronts which point to further US dollar’s losses, a short term correction might develop. The EUR/USD pair slips below 1.21. The Scandies, which have been outperforming recently are particularly prone to a sharp correction lower.

Super Thursday ahead

Datawise, it is a rather quiet week, but there are numerous risk events ahead. The majority of them culminate in the second part of the week with a „super Thursday”, meaning the European Central Bank’s decision and EU Council meeting. The latter will be devoted mainly to the final stage of Brexit talks, but the impasse over the budget and Recovery Fund is another important issue of interest. Poland and Hungary continue to oppose the rule of law principle. Although excluding both countries from the EU Recovery Fund would create some legal complications, it is certainly a credible threat. Economic consequences for those economies would be so huge, that markets have remained rather relaxed on breaking the gridlock despite Poland’s and Hungary’s unwillingness to compromise.

Conotoxia research team