The market mood went south on Monday as the latest Covid development from the UK threatens to ruin Christmas celebrations. Flights to and from the UK are now isolated.

The dollar is gaining against its peers as funds flow into safe-havens. Meanwhile, US lawmakers have reached a $900 billion deal for stimulus. Looking ahead in the week, the major market swing remains between the risk-on and risk off sentiments amid Brexit headlines. Traders should therefore watch out for developments on Brexit, stimulus, Covid and vaccines headlines and of course the macroeconomics amid the holidays. Meanwhile, let’s take a look at the recent headlines on these risk drivers.

Covid19 : Europe moves against flights from the UK

The UK has been plunged into an emergency lockdown as the government warned that a new strain of the virus is ‘out of control’ and is 70% more contagious. Therefore, the country has declared a new restriction level on London. As a result, many European countries have cancelled flights to and from the UK. The country rolled out Covid vaccines last week thus boosting a sharp rally on the GBP. However, although it’s not yet ascertained whether the new strain is vaccine-resistant, the latest development is sour for the general market mood. GBP pairs started the week with a bearish gap and have maintained the downbeat run below last week low. GBPUSD is down by over 300 Pips on Monday.

The safe-haven dollar on the other hand has received a big boost. USD is gaining across its major FX peers. CHF and JPY are other FX on the positive side of the current news. However, riskier FX as expected have been falling hard. AUD, NZD, CAD and the stock markets have shed a large part of the last week’s gain.

Brexit talks to continue this week

Negotiations failed again last week. The lead negotiators from both sides met on Sunday. However, the outstanding issues remain unsolved and thus putting pressure on Sterling. A UK government source said the EU needs to take a level of compromise to allow the deal to go through. From the latest indications, the UK won’t bulge and might go with a no-deal. They believe the EU is more responsible for the set-back. However, EU sources continue to show optimism ahead of the December 31 official transition period. If all talks are not nearing a deal, GBP will maintain the current dip. Put this together with the recent UK Covid restrictions, GBP pairs especially GBPUSD might just be starting what could be a black week.

US Congress agree on Covid stimulus

On Sunday, the US congress agreed on a new stimulus package as they wind up government activities for the year. The bill is worth $1.4 trillion government aid including a $900 billion Covid rescue package. The news is priced in by the market as general risk mood focuses more on the UK Covid strain news and fresh restrictions. Wallstreet dropped over 2.5% in just four hours on Monday before the New York session. Risk aversion is currently prevalent on Monday. Oil is down by 4% since Friday as well as Gold which recorded over 500 Pips bearish flash in just 5 hours.

Macro-Economics – Bank Christmas Holidays

There are no major market-moving macros this week as governments, banks and businesses prepare for Christmas break. However, on Tuesday and Wednesday, we have GDP reports from the US and Canada respectively before the banks in the Eurozone, Australia and Canada shut down on Thursday. On Friday, US, Canada, UK banks will follow.

Therefore, the above risk sentiments will be the major market drivers this week. Traders should watch out for headlines around these and also prepare for high volatility in the first half of the week but low liquidity in the second half.

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