Stimulus, Brexit Hopes Spark Risk-On Mood; Sink Dollar
Risk sentiment is “on” today, and at the expense of the greenback again.
Global stocks turned green and approached record levels. Treasury Secretary Steven Mnuchin presented a new $916 billion relief proposal to House Speaker Nancy Pelosi. This deal is separate from the bipartisan negotiations that have been taking place, but it is seen as a positive sign from the White House.
Indeed, this is President Trump’s first move on the stimulus front since the election. Pelosi called the proposal “progress.” Renewed hopes for a deal sent equity futures higher and weighed on the U.S. dollar. The Bloomberg Dollar Spot Index is down 0.3%.
Despite today’s exuberance, the global economy still faces a number of challenges including rising death tolls and covid cases, and unsolved Brexit trade deal. Hopefully, the United States will get some more good news on Thursday when the FDA meets to discuss and potentially approve the Pfizer/BioNTech vaccine.
Once again the economic and central bank dockets are essentially empty with only JOLTs job openings due out at 10 a.m.
What to Watch Today…
- Johnson and Ursula von der Leyen dine and deal tonight
The Euro rallied impressively to open the month, but the EUR/USD pair has been relatively quiet this week. Some have argued that the Euro’s march higher has run out of steam and the common currency will come back to down to earth in the coming months. Others maintain that the Euro still has room to run and it is just consolidating up at these new, higher levels before breaking higher.
While our general opinion is the former, risks to this thinking remain. Traders continue to try to balance a generally weaker dollar, the possibility of new stimulus in the U.S., stumbling blocks to a European stimulus deal, and rising death rates on both sides of the pond. Indeed, Germany registered its largest daily death toll yesterday.
Tomorrow’s European Bank Central Bank policy decision and Christine Lagarde’s press conference could make a significant mark on the Euro. The central bank is widely expected to increase and extend its bond-buying program. This would generally be seen as a Euro-negative move but the action is already “baked in.” However, a larger than expected stimulus number could weigh on the common currency.
The British pound is in rally mode this morning, gaining nearly a percent versus the U.S. dollar. The pound looks to snap a three-day losing streak. While no significant progress has been made this week towards a post-Brexit trade deal, optimism is high today.
Prime Minister Boris Johnson will fly to Brussels today and have dinner with European Commission President Ursula von der Leyen. The hope is that the in-person sit down will lead to a breakthrough, despite major differences remaining on key issues.
While the sterling is elevated today, traders are understandably nervous about the U.K. crashing out of the EU without a trade deal. According to Bloomberg, the relative premium to hedge against a weaker sterling over the year-end is at its highest level since the aftermath of the 2016 Brexit vote. 1% daily ranges may be the norm for the rest of the year. This has certainly been the case this week.