Summing up: Payrolls, the pound and last-minute trade deals

There’s much to digest as we near the end of the year. The next two weeks could be crucial for how 2021 will pan out. Will the Fed embark on more stimulus and hint that there could be more to come? Will the vaccine roll out be as smooth and timely as soaring stock markets suggest, or could some doubts set in that could see stocks slip at the start of the year? Is 2020 and the global pandemic really behind us, or will 2021 will marred by it too? What does the slowing US economy mean for global economic growth? Can the pound stay strong as the US/EU trade deal nears its end game?

These are heavy questions as we reach the end of the year, in this article we will look at two questions: payrolls and global growth, and the prospect of a trade deal between the EU and the UK and what it could mean for the pound. 

Payrolls – US economy stalling 

The US economy continued to create jobs for the seventh straight month last week, however, the pace of job creation in the US is stalling as the second wave of coronavirus causes more states to lockdown and threatens economic growth as we move into the end of the year. The US economy created 245,000 jobs in November, far below the 460k expected. Considering in 2019 the average number of jobs created was 200k, last month’s pace of job gains will not be enough to get 10 million American jobless back to work anytime soon. There were also signs that the job losses linked to the pandemic were becoming permanent, with the number of temporary layoffs falling to 2.8mn from 3.1mn in October. The fall in the unemployment rate to 6.7% from 6.9% was largely technical, and if the pace of job creation does not pick up in the coming months then the unemployment rate will remain high for some time. 

The Fed’s balancing act 

This leaves the Fed with a headache when they meet in two weeks. Their main target these days is the unemployment rate, and they have said that they will tolerate a period of above-target inflation in order to support the US economic recovery. However, just how much inflation will they tolerate? With jobs growth slowing sharply, the onus is on more monetary policy stimulus at this month’s meeting. That is a worthy aim, however, with the prospect of fiscal stimulus coming at some point and with the potential rollout of a Covid vaccine super-charging growth in the coming quarters, the Fed has a tough balancing act in the next few months. 

Asian and Swiss currencies at risk from dollar’s decline 

There is a risk that the Fed does not deliver the goods next week, which may threaten the very strong run for global stock indices and cyclical stocks in the coming weeks. The Dow Jones remains comfortably above 30,000 and the S&P 500 is trading at fresh record highs just below 3,700. The prospect of more Fed stimulus is also feeding dollar weakness, watching the dollar’s demise is the hottest ticket in the FX market right now. The weakness in the dollar is playing havoc with some Asian currencies that are pegged to the dollar. This is also causing the free-floating currencies in Asia to surge vs. the USD. The Taiwanese dollar is at its highest level vs. the USD since 1997, and the pressure will build for the authorities to intervene. The Chinese renminbi vs. the USD is also at its strongest level for 2.5 years. So far this has not caused too much concern for the Chinese authorities, but with the Chinese economic recovery still relying on exports, and the prospect of further dollar declines to come then we doubt that the Chinese authorities will sit back and allow the yuan to continue to rise, especially if it rises at a rapid pace. Overall, while Chinese intervention in the FX market is not a risk for the immediate future, it could become a concern for Q1. 

The Swiss National Bank will also be contemplating dollar weakness when it meets this week. The Swiss authorities are no stranger to FX market intervention; remember January 2015? However, this time the USD/CHF is resistant to their efforts to dampen Swissie strength, which is at a 5-year high. Thus, we expect to hear some modification of their intervention regime at this meeting, which could cause USD/CHF volatility. Overall, the weaker than expected pace of jobs growth in the US has very real consequences for the FX market, if the dollar continues to fall then we may not be able to rely on low levels of FX market volatility for much longer. 

The EU/UK trade talks reach another critical stage, can the pound keep turning a blind eye? 

Across the pond, the market is braced for EU/UK trade talks that are on a knife edge, according to the latest reports. The two sides have reconvened in Brussels in an attempt to break the deadlock, however, do not expect a quick resolution as the talks could go on for days. Both sides have said that they would rather delay the deadline to get a deal. Thus, it is no wonder that, so far, the markets have remained calm in the face of escalating rhetoric between the two sides. However, this also means that when a deal is reached, or not, then we could see wild movements in sterling and UK stocks, particularly the FTSE all share index. We remain hopeful that both sides aren’t stupid enough to allow the UK to leave the EU without a trade deal, we are also fairly accustomed to the growing sense of doom that both sides spurt as deadlines to get deals done near. However, the 1stof January is only 3 weeks’ away, so these talks need to progress for the deal to come into view, otherwise it could be a long way down for GBP/USD. Cable has surged in the last few weeks and it is currently trading at the highest level since May 2018, just below $1.3440. If we can break above this level, then $1.40 could be on the cards before the end of the year. But this is a major psychological level, to hit this high note we believe that there will need to be a breakthrough in the UK/EU trade talks. Thus, we could see the pace of GBP/USD gains slow at the start of the week, and GBP may give back some recent ground, with $1.34 and then $1.3280 – the 38.2% retracement of the 23 Sept low to the recent highs – both key support levels. While we don’t rule out the pound moving higher in the long term, we think now could be a good time for the GBP bulls to take a breather, even if the dollar continues to decline.