Markets slow and caution is advised

Leaving another heavy week behind us, the holidays season comes into play for the next two weeks. Given that the market is expected to slow-down in that period, as most holidays are normal working days, we would like to underscore the risks of possible thin trading that may arise during the period. Hence, be aware that market reaction to news or surprises in financial data could be disproportional to their usual or expected impact size. On the fundamental front the path of the pandemic, the negotiations in the US Congress about a coronavirus relief bill and Brexit continue to affect the markets, ending a week possibly characterised by the weakening USD. On the monetary front not much is expected ,given the slew of central bank interest rate decisions in the past days, maybe with an exception worth noting being Turkey’s CBRT interest rate decision which is due out on the 24th of December. As for financial releases there is a rather light calendar ahead for the next two weeks.

USD – Coronavirus relief bill to be the main issue

The USD seems to hesitate about continuing its weakening as it has reached a new 2 ½ year low against a number of its counterparts, in the past few days. Fundamentally the negotiations in the US Congress about a fiscal stimulus deal seem to continue to be the main issue for USD, albeit a number of analysts also have started to suggest that the market may have already priced in such a scenario. At the same time, it should be noted that the tensions between the United States and China are rising and could offset the positive mood from the negotiations of a US stimulus package. On the other hand, it should be noted that yesterday’s release of the initial jobless claims figure surprised the markets as it was higher than expected, intensifying worries for the US employment market. As for financial releases, from the US we tend to highlight on the 22nd of the month the final release of the US GDP growth rate for Q3 and on the 23rd of the month, the release of the durable goods orders growth rates as well as the weekly initial jobless claims figure and the final University of Michigan consumer sentiment indicator for December. Also, on the 29th of December we note the US consumer confidence for December and on New Year’s Eve the weekly initial jobless claims figure.

GBP – Brexit: the moment of truth

We couldn’t have said it better than EU’s top negotiator Michel Barnier, the moment of truth has come for Brexit. The UK and the EU showed a rather pessimistic tone for the outcome of their negotiations regarding a post Brexit trade agreement in the past two days. A spokesman for UK PM Boris Johnson is reported to have said that it was “very likely” there would be no agreement unless the EU changed its position “substantially”. That would imply a hardening of UK’s position just before the finish line of the negotiations. Barnier stated that the UK would have to accept limitations in the single market if the U.K. wants to cut access to these waters for European fishermen. The situation becomes even more critical given that the EU Parliament has set Sunday as a deadline for approving a Brexit deal this year. Despite a no deal scenario seeming to be the most obvious one at the current stage, we still consider that the two may employ a final effort to agree, as the stakes in play are very high for both sides. Whatever the outcome, should there be no deal, a deal, or a partial deal with a promise to continue negotiating, we expect the effect on the pound to be substantial. As for financial releases, we note on Tuesday the 22nd UK’s GDP rate for Q3 and on Wednesday the 30th UK’s nationwide house prices for December

EUR – Path of the pandemic closely monitored

The path of the pandemic in the European continent is to be closely watched by EUR traders. It’s characteristic that lockdown measures have intnesified in countries such as Germany, France and the Netherland’s with high hopes that they would be able to curb the spreading of the disease. Despite the common currency getting some support on Wednesday from the release of December’s preliminary PMI’s which outperformed expectations, the new lockdown measures could reverse the acceleration of economic activity expansion in the area, if not lead to a contraction in January. Should the measures not succeed in curbing the spreading of the pandemic, the issue could become critical for European economies as well as the common The path of the pandemic in the European continent is to be closely watched by EUR traders. It’s characteristic that lockdown measures have intnesified in countries such as Germany, France and the Netherland’s with high hopes that they would be able to curb the spreading of the disease. Despite the common currency getting some support on Wednesday from the release of December’s preliminary PMI’s which outperformed expectations, the new lockdown measures could reverse the acceleration of economic activity expansion in the area, if not lead to a contraction in January. Should the measures not succeed in curbing the spreading of the pandemic, the issue could become critical for European economies as well as the common currency’s direction. On December 21, the EU’s drug regulator is set to make a decision on the BioNTech-Pfizer vaccine, amid political pressure from Berlin. Vaccinations are expected to begin before year’s end and could create a slight euphoria in the European markets. On the other hand, it should be noted that should the Brexit negotiations fail as mentioned in the GBP paragraph, the common currency mey suffer less than the pound, yet it could also weaken, as a hard Brexit could make the recovery of the EU economy even more difficult. As for financial releases, we note EU’s preliminary consumer confidence for December, on Monday the 21st of the month.

CAD, AUD – Market sentiment to be key

Both the Looney and the Aussie seem to have strengthened against the USD in the past week, albeit mainly for different reasons. Staring with the Looney, the Canadian currency may have found some support in the past seven days from strengtening oil prices which are constantly rising. It should be noted though that USD/CAD seems about to stabilise, however at very low levels. The risk on sentiment of the past days had a positive effect also on the Loonie, yet the Canadian currency may have failed to benefit as much as it could. As for financial releases in the coming two weeks, we highlight Canada’s GDP rate for October on Wednesday the 23rd of December. Also the Aussie’s stellar run this week against the USD, supported (among other factors) by the increase of iron ore prices and China’s economic rebound, seems about to come to some sort of stabilisation. The commodity currency may have reached a pivot point in its direction, yet fundamentals in the coming days should clear it up. Especially the relationships of Australia with China and the US with China may be among the main focal points for Aussie traders. Any improvement could fuel the Aussie’s ascent further and vice versa. As for financial releases, despite no heavy impact financial releases being scheduled from Australia in the coming two weeks, we would highlight China’s NBS manufacturing PMI for December on New Year’s eve.

General Comment

The year draws slowly to an end and it seems that some issues are to become much clearer in the coming year. Given that in the coming two weeks the calendar seems to be light regarding financial releases, we expect fundamentals to be in the driver’s seat for the markets. Starting from Brexit, as noted the situation is critical and should the negotiations collapse, we could see the pound weakening considerably. On the flip side a Brexit deal, or even a partial deal could provide substantial support for the GBP. In the US should the negotiations for a fiscal stimulus succeed, we could see some safe haven outflows for the USD, albeit the market may have allready priced in such a scenario. On the flip side, a possible substantial deterioration of the US-Sino relationships could create some safe haven inflows for the USD and weaken commodity currencies, especially the Aussie which relies on exports to China. The path of the pandemic should not be underestimated, despite a vaccine being approved in a number of countries. Europe’s economic recovery is still endangered by lockdown measures and should the new measures fail to curb the pandemic we could see the common currency weakening.

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