The wait goes on for a Brexit deal with both sides urging the other to make concessions. Meanwhile, Europe is still trading high against the dollar, with growing optimism about the path of the pandemic.
With USD, the euro held back from the psychological brink of $1.2 as the dollar picked up after risk appetite soured. It comes as optimism about the US economy has started to dissipate. Stocks are starting to crumble and all eyes are on Federal Reserve Chairman Powell who will appear before the Senate Banking Committee on Tuesday.
In prepared remarks, he struck a cautious note on the economic recovery saying the “pace of improvement has moderated”. His cautious sentiment was echoed by Treasury secretary Mnuchin who pushed for a $455 billion stimulus to avoid further economic hardship.
Euro is Still Trading at Around 1.922.
The was slightly less positive news with signs of deflation in the Eurozone appearing likely to hamper gains for euro. Germany’s inflation has fallen by 1.0% and is now at -0.7% year on year. Inflation is also negative in Italy.
The Eurozone continues to battle a second wave of COVID 19, although there are signs that restrictions may be having an impact. The R rate which governs the rate of infection is below one in the UK. Hospital numbers have dropped sharply in France. In Germany experts expect infection rates to fall, although the response is beginning to stutter as state capitals start to increasingly diverge with Berlin on policy. Some states are loosening restrictions while others intend to keep them in place.
Brexit still casts a shadow over everything to do with sterling. Solid news of a deal remains elusive, although markets still expect one imminently. Suggestions that the EU’s Chief Negotiator Michel Barnier has been pressed by the European Commission to reach a deal, and that he may be open to movement on the main sticking problem of fishing rights, have raised hopes in some quarters.
The expectation is that the British pound will rally on news of any deal, at least in the short term, but will drop back if the two sides end the transition period without a workable trade deal. In the meantime, both are hovering waiting to see which way the wind blows and what’s blowing in it.
However, the downside risk for GBP is higher should the two sides somehow fail to close the remaining gaps.
Further Announcements Ahead
Elsewhere it’s a busy day in terms of economic announcements with Eurozone CPI announcements, manufacturing PMI, unemployment rates in Germany and manufacturing PMI for both France and Germany. Add to that the possibility that someone, somewhere might say something useful about Brexit and traders will have plenty of food for thought throughout the day.
Overall, though, the trend is bearish for the euro. Excited talk of Brexit deals and COVID vaccines have been replaced by renewed uncertainties and the harsh realities that, vaccine or no vaccine, coronavirus is here to stay, for the time being at least. Flexibility is key. Traders needing to be alive to sudden changes and unexpected news.
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