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Euro in Limbo on EU Summit. GBP & USD Brace for Brexit & US Fiscal Debate

Euro in Limbo on EU Summit. GBP & USD Brace for Brexit & US Fiscal Debate

2020-07-20 04:00:00
Dimitri Zabelin, Analyst
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British Pound, Brexit Talks, US Dollar, Trump Fiscal Policy, Euro Outlook, EU Summit – TALKING POINTS

  • British Pound at mercy of Brexit talks. Sterling eyeing key meeting on July 20
  • US Dollar, S&P 500 index closely watching draft of new fiscal stimulus bill
  • Euro at risk as 27 EU leaders stuck in gridlock over EUR750b aid package

Euro Groans on Fiscal Divide at EU Summit

Last week, 27 EU leaders convened to discuss the implementation of a EUR750 billion stimulus package with 500b coming the form of grants and 250b in loans. Heading into the meeting, the Euro continually rose throughout the week against its G10 peers on what appeared to be the assumption that a consensus will be reached in time.

While Europe has been afflicted with division, history has shown that when the stakes are high enough, differences will be put aside for the sake of political preservation. However, this puts the Euro at the mercy of a binary outcome with a heavy skew towards resolution. Consequently, the asymmetric risk that talks collapse could elicit a disproportional spike in volatility than if things had fallen in line with expectations.

A delay will likely cause the Euro to retreat against its peers but with particularly veracity versus the anti-risk Japanese Yen and haven-linked US Dollar. Failure to reach a consensus has wide-ranging implications not just across continents but asset classes as well. As one of the top-three largest economies in the world, derailed coordination – and what that means for growth – will almost certainly be felt around the globe.

British Pound Eyeing Brexit Talks

The politically-sensitive British Pound will be closely watching the outcome of EU-UK talks between key Brexit negotiators this week. Over the past few weeks, Sterling has experienced moments of whiplash as policymakers from both sides oscillated between broadcasting signs of progress and reinforcing the fear of irreconcilable division.

On July 20, a formal negotiation will be held after the meeting on July 9 failed to yield meaningful progress in light of “serious divergences”, to quote European chief Brexit negotiator Michel Barnier. Fishery controls continue to be a point of contention between the UK and EU. To spare readers from drowning in aquatic-based trade agreements, a simplified breakdown will be provided instead.

Brexit supporters – who rode on the wave of national reclamation – have a strong attachment to the fisheries because they reportedly see them as symbolic of the repossession of sovereignty. The EU, on the other hand, has said that an agreement on fisheries has to be negotiated as a pre-condition to the kind of free trade agreement both sides are aiming to achieve. Friction in this area – and what that could mean for a deal – could hurt GBP.

EUR/GBP Analysis

EUR/GBP continues to modestly climb, though it has been showing signs of hesitation as it bounces between the lower tier of the 0.9178-0.9144 resistance range and support at 0.9019. Failure to puncture resistance again could open the door to retesting a semi-permeable membrane at 0.8986. Breaking below that with follow-through could inspire additional sellers to enter the market.

Having said that, political volatility in both the European Union and United Kingdom could generate an asymmetric shock and distort the relative strength/weakness of these technical levels in the short term. To learn more about how politics impacts markets, be sure to follow me on Twitter @ZabelinDimitri.

EUR/GBP – Daily Chart

Chart showing EUR/GBP

EUR/GBP chart created using TradingView

US Dollar, S&P 500 Closely Watch Discussions of Fiscal Stimulus

The USD and S&P 500 index will be closely watching how officials navigate the jagged political terrain of passing much-needed stimulus and US President Donald Trump’s input. He has said that unless a payroll tax is included in the next stimulus round, he will veto it.Senate Republicans and Democrats – in an ironic but not entirely inspiring show of unity – have both rejected the idea with varying degrees of zeal.

Political friction here could rattle sentiment and punish equities and put a premium on the US Dollar. Having said that, it is difficult to imagine for the Greenback to rebound with the same magnitude that it did in March unless perhaps the fall in stocks occurred at a commensurate rate. See my weekly outlook for the US Dollar here.

--- Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitriTwitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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