After gapping higher at the open overnight, the pound has continued to push higher in this first half of today’s session, along with equity index futures. Sentiment was boosted further by the imminent rollout of vaccines in the US, where a bipartisan group of lawmakers plans to unveil a $908 billion stimulus plan later on today.
But with the initial burst of bullish momentum already taking place before the US open, we could see some profit-taking later in the day.
Vaccines optimism vs. new restrictions
The optimism surrounding the vaccines could be offset by fears over further economic slowdown because of the still-buoyant coronavirus. Just as nationwide lockdowns are over, London is increasingly likely to move to tier three - England's highest level of coronavirus restrictions - in the coming days. Germany is going into a hard lockdown on Wednesday, while new virus cases are still rising in the US, with New York stopping indoor dining. As a result, this may keep bullish exuberance to a limit.
Meanwhile, the issue of Brexit is far from resolved. While investors are relieved that a no-deal exit was averted for now, that’s not to say a deal will be reached. After the UK and EU agreed to "go the extra mile" in search of a breakthrough, the pound jumped as investors priced out the immediate risk of a no-deal Brexit. Talks over a post-Brexit trade agreement will resume later, but as Prime Minister Boris Johnson keeps warning us, both sides remain "very far apart" in key areas. Still, the fact that they are willing to continue the talks, there is hope that a deal will be reached in the last hour. The pound is thus likely to remain in a sideways range with the upside potentially capped by $1.35 until there is an actual deal. If a deal is reached, the pound could surge past the 1.35 handle, before potentially heading towards 1.40. However, as the markets have – since March – been led to believe that a deal was going to be reached eventually, the greater risk is therefore if the UK departs without a deal. This outcome will probably come as a shock and could see sterling get a good pounding, sending the cable possibly down to $1.20.
Last important week of 2020 from a macro point of view
Today’s economic calendar is very light, with Eurozone Industrial Production, which beat at 2.1% m/m, being the only noteworthy data release. But heading deeper into this week, we will have things to look forward to in what probably is the last important week for scheduled macro events. We have a handful of potentially market-moving data and four central bank meetings (see below). While data is important, the fact that investors are looking forward to 2021 with the rollout of vaccines, means they probably won’t pay too much attention to the economic calendar. Still, the central bank meetings could inspire pockets of volatility here and there.
Central banks in focus
- The US Federal Reserve (Wednesday) is mostly likely going to keep policy unchanged and avoid providing more stimulus. But like the ECB, it will undoubtedly ramp up its dovish rhetoric and emphasise the need for more fiscal support due to the still-deteriorating pandemic.
- The Bank of England (Thursday) will be keeping a close eye on the Brexit negotiations, like most of US in this industry. Last week, there was a greater possibility that the central bank was going to introduce fresh measures had the two sides agreed to a no-deal exit. But as the deadline was extended and negotiations are now going to go to the wire, the BoE may refrain from taking any actions on Thursday, but instead do so in an emerging meeting should the UK still exits the EU without a deal. A no-deal exit will likely cause severe economic damage to the UK, which is why the BoE will have to provide it as much support as it will need. So be prepared for a potential ramping up of QE purchases in the event of a confirmed no-deal exit in the weeks ahead. However, if they two sides agree on a deal then the BoE will probably steer clear of providing further stimulus.
- The Swiss National Bank (Thursday) may be the world’s most boring central bank, but when it intervenes, it does so aggressively. With the franc appreciating sharply against the dollar and the virus situation deteriorating in Switzerland, while demand for luxury goods that the nation is known for producing likely to have suffered, the central bank may be tempted to intervene in the FX markets to weaken the franc. That being said, the EUR/CHF has bounced off its lows in recent times and with the ECB unlikely to provide further measures, this cross could start to climb and alleviate some of the pressure on the franc in the months ahead anyway. But if the SNB were going to ever intervene again, now would be the moment.
Key economic data and macro events coming up later in the week
Tuesday: Chinese industrial production and retail sales; UK jobless claims and US industrial production
- Flash PMIs from Eurozone, UK and US manufacturing and services sectors; US retail sales
- US Federal Reserve monetary policy decision and FOMC press conference
- Data: New Zealand quarterly GDP; Aussie monthly employment report and US jobless claims
- Central Bank policy decision: Bank of England and Swiss National Bank
- Bank of Japan policy decision
- Data: Retail sales from UK and Canada; German ifo Business Climate
Source: ThinkMarkets and TradingView.com
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