Currencies were driven lower on Friday on fading hopes for Brexit and US stimulus deals. For most of this year, investors believed that the UK would eventually cave and agree to an orderly exit out of the European Union. However with only a few weeks before their deadline, the final round of Brexit talks are failing quickly with both sides preparing contingencies. In the US, lawmakers are expected to pass a one-week spending bill to fund the government but the House has indicated that anything beyond that would require agreement to a broader fiscal stimulus plan. Unfortunately, very little progress has been made and Senate Republicans say they do not have majority support for the current bill. If agreements cannot be reached in the next week or two, we could see sharp year-end losses in currencies and equities.

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The worry is that December 31st will be an ugly day for many Americans. Without a new stimulus package or extensions, millions of Americans will lose their extra weekly $300 to $600 unemployment check. Independent contract workers will lose access to the Pandemic Unemployment Assistance Program, millions could be at risk of eviction as the federal moratorium on evictions expire and student loan deferments end. Stocks avoided a steep decline because of vaccine optimism but there’s a lot at stake and if an agreement cannot be reached quickly, the risk of a market correction increases exponentially. For currencies, this means risk aversion and declines for high beta currencies. Yen crosses should suffer the most followed by Swiss pairs.

December is historically the third best month for stocks with equities rising an average of 1.11% between 1980 and 2018. However having hit record highs repeatedly, investors may be more tempted than usual to lock in profits this year. Even if stocks end up positive in December 2020, there will be choppy trading over the next few weeks.

Sterling fell the hardest on Friday as investors worry about a no deal Brexit. According to our colleague Boris Schlossberg, “all outside experts agree that both parties are literally 97% towards a deal and everyone universally feels that an economic divorce would be a catastrophe for both the UK and the EU political considerations stand in the way and the UK may be willing to walk away from a unified market for the price of sovereignty.” The Bank of England meets next week but the biggest story will still be Brexit.

The US dollar traded higher against most of the major currencies with the exception of the Japanese Yen and Australian dollar. US data was weaker than expected with producer price growth slowing. The University of Michigan Consumer Sentiment Index rebounded in the month of December with the index rising to 81.4 from 76.9. Economists anticipated a drop. This improvement in sentiment is a reflection of the general sense of optimism in the market. The Federal Reserve holds a two-day meeting next week. No changes are expected as the central bank feels they are already providing significant support. The prospect of a vaccine reduces the need for further easing while the surge in virus cases and current uncertainties put them in no position to consider reducing stimulus. The focus will be on changes to their economic projections and the central bank’s outlook.

USD/CAD hit a fresh 2.5 year low on Thursday before finding a short term bottom on Friday. The pair is deeply oversold and due for a stronger recovery. The New Zealand dollar also declined despite stronger service sector activity. The Australian dollar on the other hand held onto its gains.