Brexit Talks in Crunch Time As Pound Wobbles and Euro Soars

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Euro powers through 1.2050
Stocks flat
Nikkei 1.34% Dax -0.22%
UST 10Y 0.92
Oil $44
Gold $1824/oz.
BTCUSD $19056/oz.

Asia and the EU
EUR PPI 0.4%

USD ADP 8:15

Equities were flat but FX was lively as Brexit negotiations started to enter their final round with pound and euro going their separate ways.

Stock index futures were listless in Asian and early European trade albeit near record highs as investors waited for any possible fiscal stimulus action in the lameduck session of Congress. On the calendar today the market will get a glimpse of the ADP employment report and market participants will be keen to see just how badly the second wave of the virus has affected economic activity. The forecast is actually for a better print of 410K new jobs created versus 365K the month prior.

Meanwhile in FX, the euro continued to push higher breaking above the 1.2050 level after taking out the key 1.2000 figure earlier. The trade in the EURUSD is now momentum driven as long try to run stops and squeeze the last remaining shorts higher. Although the pair is clearly overbought and should see some long term resistance around the 1.2100-1.2200 level it may be premature to lay out shorts just yet.

One possible catalyst for push higher would be the final approval of the EU pandemic bonds package which has been held hostage by Poland and Hungary over rule of law clauses. There is now talk amongst the major EU economies of cutting the two former Soviet Union satellites out of the package altogether as a means of pressuring them to come on board. Although there is no legal way for the EU to cut out funding for member states, the EU does have the power to prioritize spending and could create a defacto freeze which would put a massive strain on the two east European nations budgets.

In any event if the EU funds are finally approved for dispersal the EURUSD could have one further push higher which could catch the early eager shorts offside, therefore patience may be warranted.

On the Brexit front Barnier and Frost are due to meet today to discuss the progress up to date. Yesterday, Barnier provided a briefing to EU ministers stating that the union was willing to walk away from the negotiations if the parties could not agree to favorable terms. This was seen as a diplomatic nod to France which has been adamant about not giving up too much ground on the fisheries issue, but it remains unknown just how far apart the two parties are on the key terms of the deal.

In any case, the news helped to push cable lower for the time being, knocking it down to 1.3350 but it remains bid on dips as markets continue to believe that some sort of deal will be done by year end.

Boris Schlossberg
Managing Director

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