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Still expecting a deal

The UK is a buy

The OECD, in its December economic outlook, notes perceptively that “reaching a free trade agreement with the EU is essential to limit disturbances to [Britain’s] exporting and importing industries." The financial markets are under the belief that a deal is said to be within days of consummation.

Investors were not as enthusiastic about sterling as they had been on Monday; the pound was on average just about unchanged against the major currencies. However, GBP/USD touched above $1.3440 for only the third time in two and a half years. Yes, it was more a factor of dollar weakness than sterling strength, and the EUR and CHF had a much better day with gains of more than half a cent, but investors continued to turn a blind eye to the risks for sterling.

Investment bank Goldman Sachs even went so far as to write that “the UK is a buy” because the country’s prospects are “not all negative”. Goldman’s FX strategists “expect GBP to maintain an upward trend”. FX predictions, from however big the bank, always come with a wealth warning. That said, the folks at Goldman would not have pushed out research like that, at a time like this, unless they felt fairly confident about it.


The dollar is a sell

As well as Brexit, there was also talk of a deal in Washington to deliver the fiscal stimulus that has been under discussion since July. A cross-party caucus is encouraging Congress and the administration to get something done but Senate leader Mitch McConnell sees no political mileage in it.

Much as investors would like to see another round of US stimulus, they are not convinced that anything will move ahead before Joe Biden’s inauguration in January. In any case, they have limited enthusiasm for the US dollar. It was the weakest performer yesterday for the third time in a week and has put in the worst performance over the last month, falling by an average of 3.8% and giving up more than five cents to sterling.

The US purchasing managers’ indices, which, in provisional form, had offered the dollar a boost a fortnight ago, had zero positive impact when they were finalised yesterday. Markit and ISM reported strong readings of 56.7 and 57.5 but the element of surprise was absent. Likewise with Fed Chairman Powell’s testimony to the Senate Banking Committee: investors had already seen the speech and had no more reaction to add.


More central bankers

Central banker appearances are not quite so numerous today as yesterday but they still make up a good part of the agenda. Reserve Bank of Australia Governor Philip Lowe has already said his piece, as has his opposite number from New Zealand, Adrian Orr.

Mr Lowe expects the Australian economy to be “solidly positive” in the second half of this year but the recovery will be “uneven and bumpy”. Even as he was speaking, the ABS reported that GDP had expanded by 3.3% in the third quarter. Mr Orr stayed off the subject of negative interest rates and the Kiwi was on average unchanged.

New York Fed President John Williams will be up after lunch, as will Bank of Japan Deputy Governor Masayoshi Amamiya and European Central Bank Chief Economist Philip Lane. Mr Williams makes a second appearance this evening.

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