Brexit Deal Announcement Imminent, Pound Up

• UK and EU on the verge of a historic post-Brexit trade agreement, pound advances
• Trump imperils stimulus deal, risks government shutdown
• But markets calm in thin holiday trade; dollar drifts lower, stocks edge up

Brexit deal is ‘done’

Britain and the European Union appear to be on the cusp of agreeing to a historic post-Brexit trade pact, with officials reportedly working through the night to put the finishing touches to the 2,000-page text. Negotiators continue to thrash out the final details on the thorny issues such as fisheries, potentially delaying an announcement by a few hours, but all the indications are the United Kingdom will avoid a disorderly Brexit on January 1, 2021 when the transition period ends.

The prospect of an imminent deal brought some festive cheer to the markets where risk sentiment has been dented somewhat by a setback in the race by the US Congress to pass a stimulus bill before Christmas.

The pound was up about 0.5%, adding to yesterday’s 1% gain to climb back above the $1.35 level. While that represents a substantial rebound from Monday’s dip to a low of $1.3187, it is nevertheless a relatively contained reaction, suggesting that investors are either holding back until there is an official statement out of fear of a last-minute hiccup, or expectations that a deal would be done have already been mostly priced in, raising the possibility of ‘buy the rumour, sell the fact’ trades in the coming sessions.

However, a more likely reason for sterling’s unenthusiastic response is rising concerns about the British economy, deal or no deal. The UK recorded almost 40,000 cases of coronavirus on Wednesday – the highest daily tally so far in the pandemic. The government yesterday added more regions of England to the highest tier of restrictions, effectively placing them under full lockdown. Making matters worse, travel across the Channel – the UK’s most important trade route with Europe – remains clogged up with queuing lorries and the recent easing of the ban by France has done little to alleviate the situation.

‘Santa rally’ threatened by Trump’s antics

Equities headed higher on Thursday, with European shares boosted by the Brexit breakthrough. But most Asian indices closed only moderately higher and US futures were pointing to similarly modest gains for Wall Street today.

While there doesn’t seem to be much momentum for a Santa rally heading into the seven-day holiday period, the overriding theme is still one of optimism as investors appear to be unfazed by President Trump’s threat to block Congress’ hard-fought stimulus and funding bill.

Trump vetoed lawmakers’ $741 billion defence bill on Wednesday, objecting to some of the legislation’s clauses. This sets him up for a showdown with Congress, which will likely override the President’s veto. However, a bigger danger is Trump refusing to sign the spending bill, which includes the $900 billion virus aid package.

Although there’s a slim chance Congress may hold a vote to increase the $600 stimulus check – the main point of contention – Trump has yet to clarify whether he will block the bill, which means it could still automatically become law if he does nothing within 10 days of receiving it. But that would still not prevent a potential government shutdown next week when funding would begin to run out if the legislation hasn’t become law by Tuesday.

Dollar slips on Brexit hopes, shrugs off stimulus worries

The US dollar stayed on a downward path on Thursday, seeking to erase Monday’s gains even as the long-awaited stimulus deal faced fresh hurdles before crossing the finish line. After weeks of haggling between Republicans and Democrats, investors must be used to delays by now and hopes remain high that a stimulus package will arrive sooner or later.

But apart from the soaring pound, most majors were only marginally higher versus the greenback. The euro was testing the $1.22 level, benefiting little from the signs that a Brexit deal is close, while the Australian dollar was struggling to reclaim the $0.76 handle.

In commodities, oil prices were unable to hold on to earlier gains, but gold edged higher amid a weaker greenback and expectations that the latest impasse on the spending bill will be resolved soon.