- GBPUSD steady after PM Johnson’s no-deal warning.
- Pound holding out for last-ditch deal.
- Euro set to have less pronounced reaction to hard Brexit.
- Fiscal stimulus hopes shore up risk appetite amid troubling jobs data.
UK Prime Minister Boris Johnson has issued a stark warning asking his side of the English Channel to prepare for a hard Brexit. Despite this, GBPUSD is still managing to hold around the 1.33 mark. The binary outcome (deal or no-deal) is on a knife’s edge which potentially sets the Pound up for an outsized move once the Brexit saga reaches its finale.
The fact that Sterling hasn’t yet capitulated against the US Dollar indicates that there’s still enough pent- up hope that a Brexit trade deal will be secured before the 31 December deadline. There are also reports of a contingency plan being drafted in Brussels that would maintain air and road connectivity between the UK and the EU. If enacted, such measures are expected to blunt the economic fallout from a no-deal Brexit and this is also helping limit Sterling’s immediate downside.
Pound weaker against most major currencies
To be clear, Sterling has weakened against all of its G10 peers this week, while also posting a weekly loss against all major Asian currencies. Amid fading hopes of a Brexit trade deal, the Pound has clearly ceded ground to the broader FX complex.
The worst-case scenario of a no-deal Brexit risks Cable erasing much of the 4% gap that currently sits between current levels and its 200-day simple moving average over the coming months. On the flip side, a last-minute deal could see the pair breaching the long-term resistance level of 1.35, though the runway to the upside appears shorter compared to the downside.
Euro enjoying tailwinds
The Euro is expected to fare better than Sterling in the event of a no-deal Brexit and it is no surprise that EURGBP strengthened by 1.26 percent on Thursday, registering its biggest single-day advance in three months. The single currency’s fortunes have also been aided by the bloc’s approval of its Recovery Fund stimulus plans after overcoming resistance from Hungary and Poland, along with the ECB’s comments suggesting that the central bank may not need to deploy all of its policy firepower.
Still, a last-ditch Brexit trade deal could unwind some of those gains in EURGBP, while a no-deal outcome may send the currency pair surging towards 0.93 in the immediate aftermath.
US fiscal stimulus developments remain key driver of risk sentiment
Besides the gripping developments surrounding Brexit’s final chapter, global investors are monitoring developments around the next round of US fiscal stimulus. The S&P 500 and the Dow Jones index futures are little changed as these US benchmark indices attempt to stem two consecutive days of losses. Asian stocks are a mixed bag at the time of writing.
Thursday’s release of the US weekly jobless data shows a disturbing uptick in initial and continuing claims. Coupled with last week’s underwhelming November non-farm payrolls print, such unsettling readings of the jobs market should really light a fire under squabbling politicians and get them to roll out more financial support for the economy. Otherwise, the US risks bearing permanent scars that could really hobble its ability to move into the post-pandemic era.
Should a US fiscal stimulus deal be agreed by year-end, which could set the stage for a Santa rally and propel equity benchmarks to new record highs. Such ambitions could also be buffered if the respective Covid-19 vaccines by Pfizer and Moderna are green-lighted for emergency-use application by the FDA in the days ahead.
