Post date: 07/12/2020 12:50

Investors used news that US Congress and President Trump are nearing an agreement on a fresh stimulus package as an excuse to sell the dollar against every major currency worldwide. This included Sterling last week, although the UK currency has nosedived so far this morning amid increasing jitters that Brexit deadlines are approaching, while a deal remains elusive. Beyond G10, emerging market currencies had a banner week, led by Latin American currencies. The Brazilian real in particular soared by over 4% against the greenback as investors sought to benefit from relatively healthy yields still availing outside developed economies.

News flow this week is likely to be centred in Europe. Brexit negotiations are once again coming down to the wire, with fishing rights and level playing field guarantees for the EU the two remaining obstacles. On Thursday, the ECB will hold a key meeting where markets are expecting it to expand and extend its stimulus measures for the Eurozone economy. In our view, Thursday’s inflation data out of the US may be more important than usual, as market expectations of future inflation in the US have increased markedly in the past few weeks.


Brexit negotiations continued over the weekend. Amid the noise and the rumours, as this is written it seems like progress has been made on the issue of EU fishing rights on UK waters, and “level playing field” guarantees for the EU are the main sticking point. Sterling remained remarkably resilient over the impasse late-last week, although it has fallen sharply so far during London trading this morning as investors digest the weekend’s news. Despite the dramatic headlines, we remain of the view that a modest deal agreed at the very last minute is the most likely scenario. The main data event of the week will be October GDP growth on Thursday, but markets are likely to overlook this backwards-looking news and focus on the latest headlines from the negotiations.


This is shaping up to be a critical week for the common currency. In addition to the ECB meeting on Thursday, the EU Summit will take place on Thursday and Friday. In spite of noises around potential veto of the pandemic fiscal package by Hungary and Poland over rule of law conditionality, we regard this as an extremely unlikely outcome. More uncertain is the outcome of the central bank meeting. We think that the ECB may surprise markets on the dovish side. Given how stretched the euro’s relentless rally has become, there is potential for a meaningful retracement if that turns out to be the case. USD The relentless dollar sell-off continued last week. Soft labour market data did not help the greenback. November non-farm payrolls printed well below expectations. Unemployment did drop 0.2% to 6.7%, as expected, but this was mostly due to a fall in labour force participation, the “bad” kind of unemployment drop. The report was consistent with the last couple of weekly jobless claims, and points to a slowdown in the labour market recovery from the crisis. This slowdown does increase the chances that a fresh stimulus package will be approved by Congress, but markets are expecting the impact to be modestly inflationary and are reacting to increased likelihood of its package by selling dollars – for now.