The UK-EU trade deal rollercoaster continues, with every report of a breakthrough seeming almost immediately to be denied by one of the two sides, and in truth little seems to have changed over the last week.
The phone call between UK prime minister Boris Johnson and president of the European Commission Ursula von der Leyen over the weekend has confirmed little progress. The pound suffered as a result as markets open the week, seeing a 2% decline against the US dollar, down to 1.3260 and a 1.5% drop against the EUR down to 1.0970.
As this bulletin went to press (Monday 7 December, 7pm GMT), after another lengthy phone call between the two leaders had ended, uncertainty over a trade deal continued.
It was a different story last week, when sterling continued to benefit from the vaccine-inspired improvement in financial market risk sentiment. The perception that a UK-EU free trade deal was imminent culminated on Friday in sterling’s move to its best level against the US dollar since May 2018 at just below 1.3540.
The euro reached its own best level against the USD at around 1.2177, meaning the pound/euro rate, despite climbing on Friday, has had a hard time maintaining any gains. That rate seems inexorably drawn back towards the psychological 1.10 level due to uncertainty over UK-EU trade relations.
The DXY (US Dollar Index - a measure of the value of the US dollar relative to the currency value of the country's most significant trading partners) obviously reflected this in reduced USD demand, sliding as low as 90.50, its worst level since April 2018.
The US dollar’s value was not helped by the softer-than-expected US Employment report released on Friday.
Shares in Asia have had a disappointing start to the week as global infection levels once again weigh on investor minds. The equity/US dollar pivot has seen some fresh dollar demand, notably against the pound as UK-EU talks remain at a stalemate. This has brought the DXY back above the 91 big figure, and sterling back below 1.33 and 1.10, while the euro has dropped back below 1.21.
Global equities again powered higher, with several benchmarks seeing all time highs, and even the FTSE 100 hitting a nine-month high above 6,500.
However, Asian markets slipped back overnight. Despite the increased optimism that a fiscal aid package could be agreed in the US, albeit a smaller one than originally been hoped for at $908 billion, rather than the 2 trillion Democrats had been calling for, there remains a lot of work still to get this agreed and implemented.
Oil also saw gains as the vaccine headlines spurred increased demand hopes, lifting the price of a barrel of US crude as high as $46.70.
However, reports that OPEC+ had agreed to start rolling back the cuts to production made at the height of the pandemic has weighed on the ‘black gold’, bringing the price back to the mid $45 per barrel.
Gold and silver both benefited from the weaker US dollar and recovered somewhat from their recent declines, with gold back towards the mid-$1800s per ounce and silver climbing to almost $24.50 per ounce.
The week ahead
It’s a relatively quiet week on the economic data front, but all eyes are on the political, fiscal and COVID-19 fronts.
In the US, talks over the fiscal stimulus programme will continue. The US Food and Drug Administration is expected to approve the Pfizer/BioNTech vaccine on Thursday, which would be good for equities and consequently not so good for the US dollar.
German Sentix Investor confidence survey and US Consumer credit report
UK BRC retail sales monitor
German ZEW economic sentiment survey
Eurozone Q3 GDP and employment data
US Weekly crude stocks
German trade balance
US JOLTS job openings report
US Crude oil inventories
UK monthly GDP, industrial and manufacturing production and trade balance
US weekly jobless claims data and inflation report
EU leaders summit starts
ECB interest rate decision
German inflation report
Michigan Consumer sentiment survey