The pound held above the lows of Friday when investors sold the currency after the discovery of the Omicron coronavirus variant. On Friday, traders avoided risky assets, and the British currency failed to rise, but the sharp fall in the US Treasury bond yields pushed the greenback lower and helped the pound limit its losses against the dollar.

On Monday, Sterling stabilised against the US dollar and strengthened against the euro. Although the dollar remains strong at the start of the week, the GBP/USD has continued to rise higher as risk sentiment has improved.

Omicron variant and pound outlook

The Omicron variant was discovered in South Africa last week and has created concerns around the world as countries rushed to impose border controls. On Monday, markets were calmer as they digested the news of the variant and the risks. Sentiment towards the pound remained cautious, however. Analysts believe that the long-term outlook for the pound could be threatened by further lockdowns, which will affect expectations of a rate hike. Markets are expecting an interest rate increase of 8 bps by the Bank of England on 16th of December.

Ahead of the weekend, Sterling fell against the euro, yen and Swiss franc following the Omicron variant reports. With the threat of the ongoing pandemic and the possibility of new variants, some analysts believe that markets have overreacted, especially since cases in South Africa suggest that the variant causes mild symptoms to those infected by it.

While it is important to see how governments will handle this new variant and how they will respond to its spread, if it proves to be less aggressive than previous variants then it might be easier to control and less threatening than initially considered. So, a positive outcome would be news that Omicron is not as deadly, and the existing vaccines are effective against it. On the other hand, a worst-case scenario might mean that scientists will need to work on a new vaccine that is effective against Omicron.

How will the pound fare?

The pound might recover against the euro if global markets become more positive. Sterling could also benefit from the rise in coronavirus cases in Europe and the possibility of new lockdowns throughout the Christmas period. Some European countries have begun reimposing restrictions which will affect the Eurozone’s economic recovery. This might hurt the euro and boost the pound.

The news of the new variant and the increasing reintroduction of new restrictions could force the European Central Bank to extend its quantitative easing programme beyond the proposed end date of March 2022. Tuesday’s Eurozone inflation data, which are the focus of the Eurozone economic calendar, might be sidestepped as investors focus on news about the new variant.

In regard to the UK government’s plans, over the weekend, British Health Secretary Sajid Javid reassured the public that the government was nowhere near reimposing lockdown restrictions. Javid further announced that from Tuesday, face masks will be mandatory in shops and public transports. On Monday, junior UK health minister Edward Argar said that the government does not intend to tighten rules in the coming weeks.

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The pound fell ahead of the weekend due to fading expectations of a Bank of England interest rate hike and risk off sentiment in global markets. The term “risk off” refers to traders and investors’ sentiment in the financial markets where they tend to reduce their risk exposure and focus on protecting their investments. One of the key concerns for markets is the discovery of a new Covid variant in South Africa that could be more transmissible than previous ones.  

Traders turned to safe-haven currencies such as the US dollar, yen, and Swiss franc instead of riskier assets, such as the Australian dollar, South African rand or emerging market currencies, which were sold.

New Covid-19 variant

The new coronavirus variant in South Africa has created serious concerns as there are fears the country may face a severe fourth wave and that the virus could spread internationally. More and more countries are banning flights from South Africa and neighbouring countries, while the EU has proposed to ban flights from the region. The UK, the Netherlands and Japan have stopped flights from southern African nations including South Africa, Botswana, Namibia, Zimbabwe, Eswatini and Lesotho. The above nations and Mozambique are on the red lists of Singapore, Italy and Israel.

The World Health Organization (WHO) has said it will take a few weeks to determine how transmissible and how big its impact will be, but they are definitely concerned.  100 cases have already been detected in South Africa. The variant, unlike previous ones, is the most heavily mutated version, which means vaccines may not be as effective. The new variant, (B.1.1.529) not yet named, has possibly evolved during a chronic infection of an untreated HIV/AIDS patient, Francois Balloux, director of the UCL Genetics Institute, explained. Immuno-compromised people can harbour the virus for longer, scientists said.

The new variant has driven traders to buy the yen and Swiss franc and it could further boost the US dollar. The pound is low as it is losing against the safe havens but is higher than riskier currencies. The euro has also been preferred instead of the pound, which suggests that investors focus on bigger and more global events.

 What to expect in the currency market?

Markets will keep a close watch on research of the new variant, as scientists strive to understand how vaccines and prior infections can prevent contagion and the beginning of serious illness. Any bad news regarding the new variant and its transmissibility will increase fears about the global spread of the virus and a second cycle of the pandemic.

The pound fell very low against the euro when the pandemic started last year and if the same is repeated with a second cycle, then the pound will suffer losses against safe-haven currencies. On the other hand, it could rise against the Australian, Canadian and New Zealand dollars and emerging market currencies.

If vaccines are proven to protect against this new variant, then markets will become less pessimistic, and could return to levels seen on Thursday 25 November, before the news about the South African variant was announced.

Central banks considering raising interest rates, such as the Bank of England, may reconsider tightening their policy too early due to the new variant uncertainty. If expectations for a December rate hike in the UK decline further, then the pound could lose recent gains.

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The pound will remain under pressure over ongoing Brexit tensions and dour market sentiment. Despite the positive news that the UK’s private sector expanded in November, which strengthens the case for a Bank of England rate hike, the pound remained subdued. Global risk off sentiment will be the main driver as the UK economic calendar is light. On a more general note, Barclays has forecast that the pound will come under pressure against both the euro and US dollar in the coming weeks and months and will start recovering in the second half of 2022.

Brexit

European Commission's Brexit negotiator Maroš Šefčovič expressed his disappointment as the talks with the UK have not resulted in significant progress and they could drag into 2022. He emphasised that the two sides could still make “decisive progress this week” regarding the trade of medicines between Britain and Northern Ireland, that could “generate positive momentum” for the talks.

French fishers

The UK’s months-long fishing dispute with France has heated up. French media reported on Tuesday that talks between the UK, France and the European Commission over post-Brexit fishing rights reached a deadlock. Angry French fishers are expected to decide on Thursday about what action to take, as it is possible that they will block road and sea freight that is heading to the UK via Calais and other Channel ports.  

France says the UK has denied permits to 150 French boats, while Britain claims that has every right to check whether French vessels have a track record of operating in Britain’s coastal waters.

Olivier Leprêtre, the president of the organisation that represents fishers’ interests in northern France, warned: “The poor British are already lacking some products since Brexit, and unfortunately they’re about to be lacking a few more … Britain wants access to the European market? They should give us the licences. We’ve been waiting 11 months.” Leprêtre added: French fishers “insist that the European Commission takes its responsibilities seriously and ensures the Brexit deal is respected”, and also to “warn Boris Johnson that his fishers have access to the EU market, so we should have access to British waters.”

The French foreign minister, Jean-Yves Le Drian, also said on Sunday that Britain was “engaging in exaggerated and exasperating nitpicking” when it came to the issue of the permits and called the EU to take firm action to ensure that Brexit agreements were respected.

UK PMI data

Markit reported UK Flash Manufacturing PMI rose to 58.2 in November which has fuelled expectations of a Bank of England rate hike. Experts have speculated that the Bank of England will raise interest rates in December as rising wages and fuel, energy and materials’ prices have pushed UK companies’ costs up at the fastest rate since the beginning of the index in 1998.

Around 63% of firms polled in IHS Markit’s purchasing managers survey, which is a reliable indicator of business confidence, said their costs increased this month.

The rise suggests that inflation could be more deeply rooted in the wider economy than first thought, especially if firms increase their prices for consumers.

 

 

Chris Williamson, chief business economist at IHS Markit, said the survey’s findings could force the Bank to raise interest rates next month.

The data is supportive of the British currency, but the lower pound suggests that the UK currency is more affected by the weak investor sentiment as the current market is more focused on global issues.

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According to Bloomberg, traders are increasingly pessimistic about the pound as they expect the currency to post further declines. Meanwhile, weakened euro sentiment due to the new Covid restrictions has allowed the pound to remain supported, but this will be limited, as analysts have noted.

Pound pessimism

The pound pessimism is due to a range factors. On the one hand, markets are becoming pessimistic and fear that the Bank of England will not raise interest rates in December. Others are even fearing that a tighter policy will damage the economy. On the other hand, the US dollar is strong on expectations of the Federal Reserve reducing its stimulus programme. Traders are pessimistic as they are concerned about the growth outlook for Britain, with persisting issues as Covid and Brexit uncertainty. There are also concerns that a near-term rate hike will damage the economy and will be a huge policy mistake.

While markets expect an interest rate hike in December, recent comments by Bank of England Governor Andrew Bailey and Chief Economist Huw Pill have cast more doubt, with traders becoming more cautious about unexpected pound volatility. The pound has fallen more than 5% in the past six months. On Monday, it fell again as the dollar rose following news that Jerome Powell was nominated to a second term as the Federal Reserve’s chair.

Analysts expect the pound to fall even further. They believe the UK is exposed to global economic forces and, while supply chain issues are starting to be resolved, there are economic obstacles ahead.

Covid restrictions and the euro

The pound is holding against the euro due to deteriorating sentiment towards the Eurozone following the reintroduction of Covid lockdown restrictions. While the impact is relatively limited, the euro could fall further if Germany introduces tighter restrictions in the coming days.

Covid cases and hospitalisations are on the rise in Germany, and if Covid concerns increase then the euro will suffer more.

The euro has been hurt by the rising cases across the bloc, which has reinforced the dovish outlook for the European Central Bank’s policy.

Germany's response has been to push for higher vaccination rates and increased restrictions for unvaccinated citizens. Germany is worried about the current situation and wants to control it with additional measures to curb a fourth wave in December.

Some economists believe that the current restrictions in the Eurozone will have a limited impact on the economy than previous ones, as the outlook in the long term is positive. Euro weakness is believed to be limited as sentiment could return once the spike in Covid cases reaches its peak. So, if the right measures are taken today to control the spread of the virus, then the potential and short-term euro weakness will be for the benefit of long-term economic recovery.

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The pound has risen against the euro and some economists anticipate further gains as market expectations for a Bank of England interest rate rise in December have grown even stronger. Over the weekend, Bank of England (BOE) Governor Andrew Bailey said that inflation could be "elevated for longer" but there was also a chance that it is not as persistent as initially feared. The comments have not had an impact on the market yet. According to other analysts, any potential upside for the pound might be limited or stalled due to a stronger US dollar and persistent Brexit worries.

Pound to euro exchange rate

The pound managed to enter the new week with forte and despite a stronger US dollar, as the euro declined following last week’s news that Austria and the Netherlands were reinstating a form of “lockdown.” The news of a potential lockdown has created concerns for the Eurozone economic outlook in the short-term and the single currency. Additionally, it has reignited concerns of new lockdown restrictions in other European countries.

The pound to euro exchange rate will remain sensitive to any news over the coming days about other European economies following Austria’s and the Netherlands’ new coronavirus-related restrictions.

The pound has strengthened against the euro following October’s inflation figures and the latest UK employment data. Additionally, last week’s parliamentary testimonies by members of the Bank of England have helped support the case for a December interest rate rise.

The strong labour market release has assured markets that a rate rise at December’s MPC meeting is very much a possibility. If this is repeated in next month’s release, due to be out two days before the MPC’s decision, could be enough to result in a rate hike before Christmas.

Analysts believe that the differences between the Bank of England’s and the European Central Bank’s monetary policies might be enough reason for the pound to rise against the euro. The BoE is open to the prospect of a rate hike, whereas the ECB is still on hold.

What to expect the week ahead

  • Bank of England

BoE Governor Andrew Bailey and other members of the Monetary Policy Committee will be speaking at various events throughout the week, with Tuesday’s talk on inflation from Jonathan Haskel at the Adam Smith Business School in Glasgow and chief economist Huw Pill’s appearance on Friday at an online Confederation of British Industry event.

  • Brexit

On Sunday, the European Commission vice-president Maroš Šefčovič has urged UK’s Brexit minister David Frost to end his “political posturing” in relation to the negotiations on the Northern Ireland protocol and accept that he cannot change Brexit. Lord Frost demanded “more urgency” so the dispute can be resolved but their comments demonstrate that both sides remain far apart.

Šefčovič told BBC One’s The Andrew Marr Show that he did not expect Frost’s call for urgency because “sometimes I have the feeling that in our meetings I’m the only one who pushes for urgent solutions”.

 

In an article in the Mail on Sunday, Frost explained that the EU’s “solutions don’t deal with the problems”, and that goods “which both we and the EU agree aren’t going to leave Northern Ireland should not be treated as if they were moving from one country to another – because they are not,” he said. “But at the moment the EU says it is impossible. I urge them to think again.”

Frost’s comments suggest that both sides remain firm in their positions and that triggering article 16 remains a possibility.

France’s fishing row with Britain has also added to the tensions, following France’s Minister for European Affairs Clement Beaune’s tweet on Sunday: “I will be in Brussels tomorrow to continue this essential negotiation for France and the EU. Our objective has not changed: to enforce the agreement, to obtain our licences, to defend the interests of our fishermen.” His comments reflect the French president’s remarks who accused the UK of “playing with our nerves" on the issue. Speaking on Sunday, Macron said: “We are going to continue to fight, we will not abandon our fishermen.”

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The pound held on its gains and hit a fresh one-week high against the dollar. The figures released by the Office for National Statistics showed that retail sales increased by 0.8% in October and were 5.8% higher than February 2020 levels. The rebound in retail sales strengthens the case for an interest rate hike in December by the Bank of England.

The retail sales data is in line with the rise in GfK consumer confidence. Both reports are encouraging and demonstrate that the UK economy is on the right track.

UK retail sales

Retail sales rose more than expected as consumers indulged in an early Christmas spending on toys and clothes. Retail sales rose for the first time in six months, with a 4.2% surge in spending at department stores, clothing outlets, sports equipment stores, and second-hand shops.

The ONS explained that clothing stores reported a 6.2% rise in October and the most common items bought were toys, clothes, shoes and accessories, helping bring sales close to their pre-pandemic level. More particularly, non-food stores’ sales increased by 4.2% in October 2021, with clothing stores sales only 0.5% below February 2020 levels. Automotive fuel sales fell by 6.4% in October 2021 while food store sales fell by 0.3% in October 2021. The proportion of retail sales online fell to 27.3% in October but was still higher than those of February 2020.

The ONS also reported that there was a backlash to fast fashion, as more consumers turned towards second-hand clothing. With household budgets squeezed, more people preferred charity shops for financial reasons.

Shortage fears boosted spending in October

Halloween and early Christmas shopping has helped boost spending. Helen Dickinson, chief executive of the British Retail Consortium said that retailers were relieved by the improvement in sales. Online sales remained above pre-pandemic levels while Halloween helped to boost spending further with chocolates and children’s costumes’ sales.

However, supply chain problems remain while higher prices and energy bills will put more pressure on households.

UK consumer confidence

Consumer confidence across the UK has also risen more than expected. The UK consumer confidence index, which tracks how consumers feel about their finances and the economy, rose 3 points to minus 14 in November, according to research company GfK. While consumers face rising prices and are not as confident about their personal finances, they were willing to buy expensive items. Joe Staton, Client Strategy Director at GfK, explained that headline consumer sentiment was higher despite rising inflation and a growing cost-of-living squeeze. He expressed his concerns though, as he highlighted that 2022 would be a tough year, despite the rise in both physical and virtual retail sales that showed that consumers were ready to return to normality.

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A potential break down in relationships between the UK and EU could risk affecting economic recovery and hurt the pound. The possible decision of Britain to suspend the Northern Ireland part of the Brexit deal could weigh on the pound. According to Bloomberg, “The UK warned the European Union not to start a trade war if Boris Johnson’s government suspends part of the Brexit settlement over Northern Ireland, saying a strong retaliation would exacerbate problems.” Additional concerns such as Covid and supply chain issues that could deter the Bank of England from raising interest rates may also affect the British currency.

Boris Johnson to avoid a confrontation with Brussels

Boris Johnson does not want a confrontation with Brussels. The UK is already dealing with enough problems including increasing costs of living, rising inflation and energy prices.

As the Financial Times noted, the PM wants to avoid a trade war with the EU and have a quiet Christmas following last year’s cancellation of Christmas festivities due to Covid.

In last week’s Global Britain (Strategy) committee meeting to discuss Brexit concerns, senior cabinet ministers analysed the political tensions between Britain and the EU and the dispute over trade in Northern Ireland.

Rishi Sunak, chancellor of the exchequer, warned that entering a trade dispute in regard to the Northern Ireland protocol would create problems, especially as Christmas is coming up.  To avoid any confrontation with Brussels, Johnson asked chief negotiator Lord David Frost to return to discussions with Brussels and try to resolve the dispute over Northern Ireland.

The shift in tone is intended to provide the necessary space so that negotiators can try to resolve the Northern Ireland dispute and to start repairing UK-EU relations.

Brexit is already affecting Britain economically. The Office for Budget Responsibility said last month that Brexit’s long-term effects on the British economy will be twice that of the Covid pandemic. The OBR believes that total UK imports and exports would “eventually be 15 per cent lower than had we stayed in the EU”.

Pound to rise further, analyst argues

Despite above risks, the recent gains of the pound due to higher inflation data and a strong jobs report appear to further lend support to hedge fund analyst Savvas Savouri’s argument that the pound will post more gains. Savouri believes that the pound will rise further due to the economic backdrop, potential higher interest rates and increased demand for the pound from China.

According to Pound Sterling Live, Savouri said that "Sterling is poised to gap-up impressively for several reasons, including the strong UK economic backdrop, a sensible and sustained rise in the bank rate, and a potentially larger weighting in the currency basket of the People’s Bank of China.”

Because of Brexit, Savouri says the pound continues to be valued much lower and is cheap according to his view. Savouri has argued that the pound will do what it did back in 1996: “after four years of weakness following its shock ERM exit in September 1992, the pound gaped-up impressively."

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The pound strengthened against the euro and hit a new 2021 high following the release of inflation data. UK headline CPI inflation rose 4.2% year-on-year in October according to the ONS and was higher than last month's 3.1%. The inflation rate is the highest in a decade since November 2011, when the CPI reached 4.8 percent.

The rise in inflation has strengthened market sentiment as investors are now expecting the Bank of England to raise interest rates in December. Both Tuesday’s labour data and inflation data on Wednesday show that an interest rate hike is more likely, as the Bank might not be able any longer to keep interest rates at historic lows.

Inflation data

CPI inflation rose 1.1% month-on-month and core CPI inflation rose 3.4% in October. Input inflation at factories remained strong with PPI input prices rising 13.0% year-on-year in October. October’s inflation rise was driven by 11.9% month-on-month rise in utility prices. Food inflation rose from 0.9% to 1.3% and fuel inflation from 17.8% to 21.5%.

Capital Economics have said that despite rising inflation, CPI inflation will fall back in the second half of next year, perhaps closing on the Bank of England's 2.0% target by December 2022.

So even if interest rates rise from 0.10% to 0.25% in December and even 0.50% in February, Capital Economics don’t think that rates will reach the level of 1.00-1.25% currently priced into the market for the end of 2022.

Governor Andrew Bailey “very uneasy” about rising inflation

Bank of England governor told MPs that he was “very uneasy” about the UK’s rising inflation rate.

While providing evidence to the Commons Treasury select committee, Andrew Bailey said that the rising cost of living was troubling and said that “all meetings were in play” as the Bank could start tightening its policy at any of its upcoming meetings.

The Bank anticipates inflation to increase at 5% next spring, but Bailey said he avoided voting for a rise in borrowing costs this month because he wanted more evidence on the market after the end of the furlough scheme. He noted “I’m very uneasy about the inflation situation. I want to be very clear on that. It is not, of course, where we wanted to be, to have inflation above target. On the decision itself, however, it was a very close call in my view.”

He explained that anecdotal evidence suggested that there was no significant rise in unemployment after the closure of the furlough scheme at the end of September. In regard to markets’ disappointment following the Bank’s decision to keep interest rates unchanged earlier in November, Bailey said that neither he nor any other Bank policymaker had ever promised a November rate rise.

Monetary Policy Committee member Michael Saunders, who voted for a November increase, said that delaying action might lead to interest rates rising faster and further in the future.

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Sterling rallied following strong labour data which has now strengthened the case for a Bank of England interest rate rise in December.

ONS jobs report

The ONS data showed that job vacancies reached 1.17 million in the three months to October due to worker shortages. The UK economy is recovering but inflation remains a concern. The unemployment rate has fallen to 4.3%, which is much lower than expected and near to its pre-pandemic level. British employers hired more people in October after the end of the government's furlough scheme. The number of business staff on payrolls increased by 160,000 to reach 29.3 million, which is 0.8% higher than February last year before the pandemic began.

Sam Beckett, head of economic statistics at the Office for National Statistics (ONS), said: "It might take a few months to see the full impact of furlough coming to an end, as people who lost their jobs at the end of September could still be receiving redundancy pay. However, October's early estimate shows the number of people on the payroll rose strongly on the month and stands well above its pre-pandemic level."

Rushi Sunak, the chancellor of the exchequer, said that Tuesday’s report shows the success of the job retention scheme: “Today’s numbers are testament to the extraordinary success of the furlough scheme and welcome evidence that our Plan for Jobs has worked. We know how vital keeping people in good jobs is, both for them and for our economy – which is why it’s fantastic to see the unemployment rate falling for 9 months in a row and record numbers of people moving into employment. Our Plan for Jobs is at the heart of our vision for a stronger economy for the British people, with schemes like Kickstart and Sector Based Work Academies continuing to create opportunities for people up and down the country.”

The ONS also said that in October the number of people seeking out work benefits fell by 14.9K, despite that after the end of the government's job support scheme an increase in unemployment would have been expected.

Bank of England and interest rates

The jobs data has increased the likelihood that the Bank of England will raise interest rates from their record lows before the end of the year. Analysts have expected the Bank to raise rates earlier this month, but it decided to keep them on hold. The governor of the Bank of England Andrew Bailey told MPs that the Bank wanted to see evidence and official data of the impact of the end of furlough before it made a move.

The pound rose ahead of the jobs report following the parliamentary appearance of members of the Bank of England who said an interest rate rise could happen at any of the upcoming Monetary Policy Committee meetings. Appearing before UK lawmakers on Monday Bank of England governor Andrew Bailey said that the labour market is heading in a direction consistent with higher interest rates. He said that the labour market is "becoming significantly tighter" and that the transition out of the furlough scheme has not led to higher unemployment. Bailey noted that the MPC will have a clearer picture at the next policy meeting.

Paul Dales, chief UK economist at Capital Economics, explained that the data was positive and if the next jobs report is equally strong then the Bank will have enough reasons to raise interest rates. He said: "Overall, it doesn't look as though the labour market loosened much after the end of the furlough scheme. If the next labour market release on 14 December tells a similar story, we think that will be enough to prompt the Bank to raise interest rates from 0.10% to 0.25% at the meeting on 16 December."

The Bank believes that a strong labour market could also mean higher inflation which can be rectified by higher interest rates.

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The pound has grown stronger against both the US dollar and the euro, due to a weaker US dollar following a drop in US consumer sentiment in November and sliding US Treasury bond yields. The positive sentiment in the financial markets helped boost the pound and weaken the safe-haven US dollar, but hawkish Fed expectations will likely limit the greenback’s losses.

Apart from this, the possibility of Britain triggering Article 16 and suspending parts of the Northern Ireland Protocol could push the British pound lower. However, foreign exchange analysts at Barclays have said that Brexit tensions relating to the Northern Ireland protocol have not impacted on the UK currency yet, as the two sides seem to be closing in on an agreement and any major confrontation will be avoided. The EU’s lead negotiator, Maroš Šefčovič, said on Friday that a deal could be agreed this week.

Pound strength

The pound’s strength demonstrates, as analysts have suggested, that concerns about a trade war between the EU and the UK if the UK triggers Article 16 have not affected the currency market. Although some analysts believe that the pound will suffer in the event of Article 16 being triggered, others have said that the market is not so much influenced by Brexit tensions as risks of a no-deal are exaggerated. Barclays, for example, expects that a possible scenario would be a trade war or a no-deal Brexit, but both would take time to happen due to legal challenges and notice periods.

While a trade war between the UK and EU would affect the economy, this will not stop the Bank of England from raising interest rates at its December Monetary Policy Committee meeting. The Bank has lowered interest rates or kept the lower for longer in the past when sentiment regarding Brexit deteriorated. In general, if the Bank is more subdued in regards to Brexit, then the impact on Sterling will be limited.

Barclays expect a moderate escalation towards a "trade war" with economic costs to be more complex in the long term. Brexit will impact on GDP, with increased tensions and shortages, as well as decreased trade and productivity.

Triggering Article 16: An all-out trade war?

The UK has threatened to trigger Article 16, which provides a safety net in the Brexit arrangements and ensures that trade between Great Britain and Northern Ireland will be smooth while avoiding a hard border with the Republic of Ireland. Prime Minister Boris Johnson has rejected the European Union’s proposals as he wants to rewrite arrangements agreed to in years of negotiations. If the government does trigger Article 16, the worst-case outcome could be an all-out trade war.

Article 16 which is a clause in the Northern Ireland Protocol, agreed in October 2019, sets out the process for taking unilateral safeguard measures if either the EU or UK decides that the deal is leading to serious issues or a “diversion of trade.” Such safeguards will mean suspending parts of the deal. A trade war, industry leaders have pointed out, could have devastating effects on the economy, hitting British exports and disrupting supply chains. How much this will affect the currency market remains to be seen, but markets are more optimistic for the time being.

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