Daily Market Pulse

Final EU Council summit of 2020

5 minute read


The DXY, which tracks the U.S dollar against a broad basket of major currencies, regained a few ticks (0.13%) on Wednesday as the risk-off sentiment has started to flake away. The market narrative for the USD remains around Brexit developments, where negotiators should reach a deal before Sunday or financial markets will have to face a no-deal Brexit. Traders also continue to focus on the U.S relief package talks. Meanwhile, this afternoon brings November’s Consumer Price Index report, which is likely to show that price pressures are remaining muted, and last week’s jobless claims numbers, which should resume their rise after Thanksgiving dipped at the end of November.


The common currency slid 0.17% against the USD on Wednesday, with investors waiting for today’s final EU Council summit of 2020. The European Central Bank will announce their latest policy decision today, with expectations high heading into the meeting, after policymakers promised to deliver a sizable stimulus package. The summit comes after Hungary and Poland lifted their veto over a landmark European Union stimulus package in exchange for a delay in a sanctioning process that could strip them of their access to the funds. Although Brexit is not on the official agenda of the summit, the issue is expected to come up during the meeting. 


The British pound ended the day 0.32% higher against the USD on Wednesday, with investors pricing in a Brexit deal. Nevertheless, talks over dinner between Prime Minister Boris Johnson and European Commission President Ursula von der Leyen ended without a breakthrough yesterday evening. Yet, the Bank of England Governor Andrew Bailey has warned a “hard” Brexit would cause extensive damage to Britain's economy more so than the Covid-19 pandemic, and the impact of the change might be felt for decades. Turning to data, earlier this morning, the U.K GDP grew by 0.4% in October 2020, the sixth consecutive monthly increase, although growth has slowed in recent months and activity remained almost 8% below its pre-crisis level, Office for National Statistics said.


The Japanese yen slid 0.06% against the USD on Wednesday as risk-off investor sentiments began to fade. Apparently, the JPY took a hit from the U.S fiscal relief negotiations impasse and amidst an elusive Brexit deal arrangement. Also, producer prices data were not welcomed by investors, albeit the figure was unchanged in November compared to the previous month. On a yearly basis, the Producer Price Index (PPI) was down 2.2%. Given the lower inflation and the timid fiscal response, market participants are already wondering how the Bank of Japan will further stimulate the fragile Japanese economy. 


The Loonie was flat against the greenback on Wednesday amid a choppy trading session. As expected, the Bank of Canada kept the overnight rate unchanged at 0.25% and committed to holding the rate at its current level until economic slack is absorbed and the 2% inflation target is achieved, which it does not expect to occur until 2023. Moreover, although there are hopes of a massive vaccination in the near term, surging caseloads and tighter restrictions will complicate Canada's economic recovery, with the peak impact likely bearing out early next year. Deputy Governor Paul Beaudry will give a speech Thursday providing insight into the bank’s thinking. Also, it will release a new set of economic forecasts at its next monetary policy report in January.


The Mexican peso erased its gains from the day before amid expectations that the Mexican’s central bank (Banxico) will resume rate cuts after a “pause” at its last meeting. The MXN inched down 0.46% against the USD on Wednesday, after recent data showed that consumer prices rose less-than-expected 3.33% in the year through November – the lowest level in five months. Thus, given the current inflation, the deep recession, timid fiscal response, as well as the still relatively high level of nominal rates (4.25%), this backdrop should encourage Banxico to ease further.


The CNY weakened a bit (0.16%) against the USD on Wednesday, even though recent money supply data reaffirmed that China is still maintaining a healthy supply of credit to bolster the economic recovery. According to China’s central bank, the country's M2, a broad measure of money supply that covers cash in circulation and all deposits, rose 10.7% year on year to 217.2 trillion yuan at the end of November. Looking ahead, investors will wait for the Foreign Direct Investment report later today. Tough political deals in Brexit and in the U.S Congress are still weighing on risk sentiment and pressuring global equities which in turn has supported the USD.


Brazil’s central bank (BCB) maintained its benchmark interest rate (SELIC) at 2% per year. It was the third consecutive meeting in which the BCB kept unchanged the SELIC at the current level - the lowest in the historical series. Although the BCB’s decision was made after the trading session, the policy decision was widely expected by the market, which led the BRL to trade in red and fall 0.98% against the USD on Wednesday. In the meantime, the higher inflation, topping the central bank's official year-end target, lending weight to expectations that the tightening cycle will begin next year and earlier than thought. Today, investors will keep a close eye on the October Retail Sales report, which is likely to show another solid rebound.


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