Happy New Year! The topics of 2020 continue this year – a number of developed and developing countries continue to report new daily highs of coronavirus cases, the control of U.S. Senate is determined in Georgia this week and Brexit agreement still leaves a number of issues open.
Brexit agreement, signed on Christmas Eve between the leaders of the EU and the U.K., has seemingly closed a chapter in the relationship of the two. GBPUSD has marched to levels of 1.3681 – last seen in April 2018. A number of issues leave the Pound vulnerable though. Firstly, the U.K. government has projected that the projected GDP will be 4.9% lower after 15 years, compared with staying in the single bloc. And that’s even with the free trade agreements in place. Moreover, the EU is the single most important trade partner for the United Kingdom. 43% of exports (GBP 294 billion in 2019) and 52% of imports (GBP 374 billion) from the EU will be subject to documentation and paperwork after June 2021. It should be noted that Brexit takes effect in parallel with China becoming the EU’s most important trading partner with around US$ 590 billion worth of goods exchanged between January to October 2020, as per Rosenberg Research. The services industry got a little focus in the Brexit agreement, despite its heavy weight in the U.K.’s GDP. A whole 40% of the GDP consists of services and with London losing its importance as financial capital, this is expected to shrink in the coming years.
The final two seats for the U.S. Senate race are determined this week in Georgia. Both Republicans as well as Democrats are pouring unparalleled sums of money into their campaigns, making these among the most expensive Senate races in history, as per WSJ. Democrats have reportedly been invested by campaigns and outside groups with beyond US$ 500 million, while four outside groups associated with Republican Majority leader Mitch McConnell alone have spent US$ 138 million in the races. The incoming Senate has currently 48 seats for Democrats and 50 for Republicans. Democrats would need both seats to take control – with Vice President Kamala Harris being Democrat, she would be able to break ties for any legislation. Assuming Democrats get those two seats, which seems increasingly possible looking at the early-voting electorate, President-elect Biden would be able to implement his plan. We are likely to see further stimulus in the form of fiscal spending with a focus on infrastructure and green energy but also higher tax on capital. His economic policies are expected to increase fiscal deficit and government debt but also create jobs and promote economic expansion that would bring in more tax revenue. US dollar is likely to weaken in such expansionary fiscal environment that is supported by monetary easing by the Fed.
The markets have been extremely bullish at the back of a number of fundamentals – S&P500 has reached another all-time-high of 3,756.08. The same goes for Nasdaq100 that closed 12,888.28 on Friday. Gold is currently near 2-month high of 1,927.33 while EURUSD trades near 1.22688 and GBPUSD is near 2.5-year highs of 1.36926
Have a great trading week ahead!