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Cable Feels The Heat From EU Pressure

Cable Feels The Heat From EU Pressure

  • Equities remain bid
  • EU/UK tensions rise on withdrawal commitment
  • Nikkei 225 -0.19% Dax -0.21%
  • UST 10-year 0.694
  • Oil $39.60
  • Gold $1895/oz
  • BTC/USD $10905/oz.

North America Open

  • USD Personal Income/PS 8:30
  • USD Weekly Jobless 8:30
  • USD ISM Manufacturing 10:00

Equity markets were well bid as negotiations continued on a possible second fiscal stimulus bill in FX cable came under pressure when the EU notified the UK that it will pursue legal action if there was no change in a current Internal Market Bill that abrogated former treaty arrangement regarding Northern Ireland.

The pound was lower by 70 pips in the wake of EU action to put the UK “on notice” over the language in the IMB that the Commission believes violated prior international agreements. However, the was just a formal procedure requiring the UK to simply respond within one month to the EU’s complaint. The two parties continue to negotiate an exit arrangement for the UK even as they butt heads over the Northern Ireland issue.

Some analysts believe that there is now close to 50% chance that the EU and UK may not come to a mutually agreeable arrangement with the UK spinning out of the union under the WTO rules and such a scenario could take sterling towards the 1.2000 figure. But it is doubtful that both parties will allow for such total financial dissolution to take place given the stakes involved. Although PM Johnson has been playing hardball with the EU we believe that he will eventually compromise especially as the UK economic growth slows from the resurgent growth of new COVID cases.

The market also appears to have that as the base scenario with cable holing bid above the 1.2800 level despite the seemingly ominous news. Still, the whole Brexit saga has been marked by intransigence driven by political rather economic considerations and the risk that it would devolve into a hard breakup is not insignificant. As we move closer to the end of the year the pressure on the pound is sure to escalate if no progress is made and that in turn could become another catalyst for UK and EU to come to terms.

In the equity market, the upward drift remains in place as investors are buoyed by the latest economic data showing a stronger than expected recovery in demand and the hope that a second stimulus bill will come shortly. Yesterday House Speaker Pelosi and Treasury Secretary Mnuchin suggested that some progress was made but the two sides remain apart on the total amount with Dems looking for a 2.2 Trillion bill while Republicans are sticking to their 1.5 Trillion offer.

Meanwhile, on the economic front, yesterday’s better than expected ADP figures suggest that the labor market continues to recover stoking hopes that tomorrow’s NFPs will beat their mark providing a further lift to stocks. Ahead we will have jobless claims and ISM Manufacturing figures later today, but the eco data will take backstage to any news out of DC, and even if the data beats equities could reverse quickly if the markets sense that no deal is coming before the election.

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