The Pound was under pressure earlier and was showing about a 0.5% decline on the day against the Dollar and Yen, and about a 0.4% decline versus the Euro, until the UK government announced that tomorrow’s self-imposed deadline has been relaxed. Cable bounced from 1.2900 to 1.2975, EURGBP moved to 0.9045 from 0.9100 and GBPJPY spiked to 136.75, from 135.64 lows.
However, it is still the eve of the EU summit. Boris Johnson said that the “shape” of a deal must be visible by tomorrow, which is a deadline set in fudging language. Johnson and the European Commission head von de Leyen will be talking this afternoon via video conference, presumably to establish whether the “shape” of a deal is in view.
The rhetoric from both the UK and EU has reached fever pitch, with both sides strongly emphasizing that there will not be a deal at any price. Johnson blinked first. The apparent extreme hawkishness of Spain and France on fishing rights is notable, while Johnson is under pressure from the powerful ERG faction of his party not to concede on level playing field rules. Sources cited by both Reuters and Bloomberg claim that EU leaders will be issuing a communique later declaring that there hasn’t been sufficient progress for a deal. The stakes are enormous, especially for the UK, both economically and politically, and in consideration of this we continue to expect there will be a deal, albeit a very limited one.
Elsewhere, the Dollar and Yen are holding firm. EURUSD has ebbed into one-week low territory in the lower 1.1700s. USDJPY has become rooted around 105.50, while yen crosses are softer.
Chinese demand for JGBs is at a three-year high, reportedly. A JPMorgan research note ponders that part of the reason may be to weaken the Yuan, and notes that JGB yields are in fact favourable compared to German and Swiss paper. New Covid cases continue to billow in Europe. The Netherlands is going into a near-full lockdown, and the UK Telegraph cited a senior government source saying that there is at least an 80% probability of a full “circuit breaker” national lockdown.