FX outlook: Parky’s quick take – 15 December 2020

15 December 2020

Neil ParkerFX Markets Strategist

View bio

Other insights

View more insights

What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.

United Kingdom

And the band played on…

One of the comments about the sinking of the Titanic was that the band continued to play whilst the ship sank. To some extent that’s seemingly how the Brexit trade deal negotiations feel. Both sides have agreed to continue talking, whilst recognising that substantial differences still remain over key issues like state aid, a level playing field, court jurisdiction and fish. Some progress is being made, but talks were due to end weeks ago, and the progress that is being made is interminably slow.

The GBP has bounced around, falling and rising, as the markets become less, and then more, confident about the prospects for a deal, but will the end of the year deadline hold for a deal to be secured and ratified? The roll out of vaccinations for COVID-19 also began last week, providing some confidence for recovery as we head rapidly towards the close for the year and the beginning of 2021. Last week’s data and surveys pointed to further strength in the UK housing market, and a better October, in terms of GDP (Gross Domestic Product) growth, versus expectations. Overall though the data and surveys are insufficient to support any additional rally in the GBP, which is consumed by the turn of events on Brexit.

This week sees plenty of additional data released. On Tuesday we have the latest labour market figures, which are expected to record a further increase in unemployment and a drop in employment in the 3 months to October. Wednesday sees the November consumer prices inflation figures released, and these are likely to show a worsening in inflation rates versus the undershoot in October. Finally on Friday we have November retail sales released. One of the bright spots in the UK economy recently has been the strength of retailing, although November is likely to have proven much tougher, with non-essential shops shut for much of the month across England. Will the retail space have enjoyed a boom in online sales, especially with big discounting events coinciding with that month? The data of itself is unlikely to generate any sustained GBP strength, in my view.

This week also sees the Bank of England Monetary Policy Committee meeting on Thursday. No changes in interest rates are expected, and the quantitative easing programme is expected to remain at £895bn, having been expanded by £150bn in November. However, the BoE (Bank of England) might have more to say about the risks of a no deal on UK/EU trade post the end of the transition period, which could prompt some moves lower in the GBP, in absence of any deal news from negotiations. The BoE will keep their options open, and would act swiftly if there is a further negative shock risk to the UK economy over the coming weeks.


Holding up, but tougher restrictions loom in Germany 

Last week saw comments from the German government to suggest that, with case numbers and deaths increasing, they were to toughen restrictions throughout the Christmas period until 10th January, only relaxing them temporarily from the 24th-26th December. This tightening of restrictions could adversely impact the largest European economy, and thus require additional fiscal loosening in order to compensate. The data and surveys from Euroland last week reported that the economy was, in general, bearing the renewed restrictions well, but that one important ingredient to the recovery was still missing. Consumer prices were still in the negative column, at -0.3% year on year, according to the November inflation data, and this is something that was, and is, a worry for the ECB (European Central Bank).

Speaking of which, last week saw the ECB expand its Pandemic Emergency Purchase Programme by a further €500bn, extending it to March 2022, and it extended the targeted longer term refinancing operations to June 2022, allowing for a further 3 operations to be conducted. There wasn’t a sense that the ECB had done more than expected, and there wasn’t any great positive or adverse reaction in markets to the announcement. The sense was that the ECB has left the door open to additional monetary loosening, if required, but it hoped that with multiple vaccines landing shortly, that this would prove unnecessary.  

For this week, there are few releases or events to catch the eye. Market attention will likely remain focused on the UK-EU trade discussions, but with the markets unlikely to be given a deal to examine, there may be more interest in events across the pond, in the US. For the EUR, additional upside is unlikely to be domestically driven.  

United States

Stumbling towards additional fiscal support   

Last week saw some movement in the discussions between the White House, House of Representatives and Senate on additional fiscal support for the US economy and local governments. The bi-partisan package of fiscal relief, worth $908bn gained traction with the White House, and US Treasury Secretary Steve Mnuchin, described discussions as encouraging, whilst pitching his own $916bn programme of measures. US Senate Majority Leader, Mitch McConnell, was optimistic about the prospects for the latter deal gaining support within the Senate Republican group, as it including some important guarantees for businesses over COVID liability. The USD remained under pressure, with the markets ignoring data and survey releases, as they are likely to in the run up to year end.  

This week, the focus is on the Federal Reserve monetary policy decision, due on Wednesday. The minutes of the November meeting suggested that the Fed would look again at the level and speed of bond purchases to help support the US economy. Meanwhile, the Beige Book highlighted the pace of expansion was slowing, with the labour market showing signs of stress as well. So will the Federal Reserve loosen further, and will it be helpful to the recovery? 

The coronavirus infection levels continue to hold at over 200k per day on average across the US, which could bring about a tightening in restrictions in early 2021. This will intensify the need for additional fiscal support, whilst the vaccine rollout gains critical mass. The US recovery is likely to only slowly gain traction in 2021, which could also prove negative towards the USD.  

Central banks

Any risks of loosening this week? 

Last week’s central bank meetings, outside of the ECB’s, were dull affairs, with none of those scheduled to announce loosening policy from already ultra-loose levels. The Bank of Canada holds a watching brief over what its neighbour may choose to do this week, whilst the Brazilian central bank has some additional room for manoeuvre, but chose not to  deploy it at this time, despite the challenges its economy continues to face.  

This week’s meetings have already seen no change from the Kazakhstan central bank, as expected, but the bulk of the interest around central bank meetings occur towards the end of the week. On Thursday we have announcements from the central banks of Indonesia, the Philippines, Switzerland, Norway, the Czech Republic, Mexico and Taiwan. The Philippines is viewed as the only central bank possibly looking to ease policy further, but it is a close call between that and no change. On Friday, central banks from Japan, Russia and Colombia are all expected to leave monetary policy on hold, with the BoJ (Bank of Japan) waiting to see what additional stimulus the Japanese government is likely to offer.  

To read the previous quick take, click here

To visit our FX Hub, click here.


This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2020 © NatWest Markets Plc. All rights reserved.