The pound to US dollar exchange rate has strengthened during the early Tuesday morning in Europe following the release of upbeat UK data. UK claimant count change fell to -56.9K and the unemployment rate was also lower to 3.7%. The positive numbers have boosted sentiment with traders expecting further upside.

At the same time, there is some unease ahead of a speech from Fed Chairman Jerome Powell, as well as any Brexit announcements that could limit potential gains for the British currency.

Claimant count change for April

The UK claimant count change for April dropped below the -38.8K which was forecast and the -46.9K in previous readings to -56.9K. The claimant count change refers to the additions in the unemployed labour force who have applied for jobless benefits. Today’s reading demonstrates a tight labour market.

ILO Unemployment Rate falls to 3.7% in March

On Tuesday, it was reported by the UK's Office for National Statistics that the ILO unemployment rate fell to 3.7% in the three months to March from 3.8%. The reading was slightly lower than the market expectation of 3.8%. The ILO unemployment rate released by the National Statistics refers to the number of unemployed workers divided by the total civilian labour force. It is an important indicator for the UK economy and the labour market in particular and shows lack of expansion and a weak economy when the rate is up, while a decrease of the number is considered positive. It is worth to note that here is a substantial reverse correlation between unemployment and inflation. A higher-than-expected unemployment rate tends to push the pound lower.

Also released today, was the average earnings including bonus and excluding bonus which rose by 7% and 4.2%, respectively, on a yearly basis.

The optimistic UK employment numbers reinforce market expectations for faster rate hikes bybthe Bank of England (BOE). However, analysts noted that this has been priced in and that the pound could find further direction from new developments. Sterling was also supported by a slightly weaker US dollar as market sentiment recovered following Covid headlines from China and disappointing US data and Fedspeak.

What to look forward to today

Looking forward, today’s speech from Fed Chairman Jerome Powell will be important for the GBP/USD currency pair with markets anticipating Powell to defend a 50-bps rate hike. If he does not mention this, the US dollar could weaken.

At home, UK PM Boris Johnson is expected to release details of changes to the Northern Ireland Protocol (NIP). The PM has confirmed he will propose legislation to overrule the Northern Ireland protocol, despite warnings from Brussels and a request from the Bank of England not to initiate a trade war with Europe. The prime minister said his government wanted to “fix” the protocol and not to “scrap it.”

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The pound has struggled on Monday morning amid renewed risks as market sentiment has deteriorated and Brexit fears concerning the Northern Ireland Protocol (NIP) have returned.

Brexit

The UK Prime Minister (PM) Boris Johnson is preparing for changes in the NIP in order to come to an agreement with the European Union (EU). The UK government will reveal plans for changes in the NIP on Tuesday, but the EU has warned that any such actions will result in the potential cancellation of a trade deal with Britain.

Despite Brexit concerns, an article in the Financial Times (FT) has said that British manufacturers are optimistic as they attempt to ease supply chain concerns. According to a survey by Make UK, the manufacturers’ trade group: “Three-quarters of companies have increased the number of their British suppliers in the past two years.

Nonetheless, the current risk-off mood and gloomy market sentiment about Brexit will weigh on the pound to US dollar exchange rate.

Treasury Committee to question BoE senior figures

On Monday, the Monetary Policy Report hearing in parliament could confirm traders’ concerns about how their expectations for Bank of England interest rates might need to be readjusted and could create further disappointment. The Committee is likely to discuss whether the BoE’s recent decision to increase interest rates has weakened the economic outlook for the UK, as well as increases in the cost of living. The weakened consumer outlook and real income squeeze will make it difficult for the Bank of England to deliver anything close to what markets are currently expecting.

Economic data to move the pound this week

While parliamentary testimonies from BoE policymakers this afternoon will influence Sterling, key economic releases coming out this week including the latest employment numbers on Tuesday and April’s inflation data on Wednesday will have an impact too.

On Tuesday, jobs figures are expected to demonstrate a tight labour market and possibly some marginal acceleration in wage growth.

On Wednesday, the April inflation report should also show an increase in the headline rate above the 9.0% mark (2.5%+ month-on-month reading) while the core rate is forecast to rise above 6.0%. Analysts expect these numbers not to have a major impact on monetary policy since the Bank of England has already included double-digit inflation later this year in its latest forecasts.

Wednesday’s inflation number will be the most important release and it could cause some volatility considering the Bank of England’s recent cautious tone and warning against the number of interest rates expected by markets. Even if there is a pleasant surprise this Wednesday, analysts have warned that with the BoE having pushed back quite aggressively against market expectations, the pound will find it difficult to get a boost.

 With the current volatility and weak market sentiment, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

The pound has continued to trade within a stable range despite growing concerns about Brexit and the UK economic outlook.

Brexit

The Northern Ireland protocol row has returned with the UK threatening laws to disapply parts of the deal and the EU threatening to revoke the trade deal with the UK. The current threats come at the time where negotiations with the EU over the protocol are about to restart.

Late on Tuesday, the UK foreign secretary, Liz Truss, issued a lengthy tirade against the EU criticising proposals it made last October about checks on goods leaving Great Britain and entering Northern Ireland. She said the EU’s proposals will make current trading arrangements worse and lead to consumer products disappearing from shelves, while adding more pressure on businesses.

As she said, the UK “will not shy away from taking action to stabilise the situation in Northern Ireland if solutions cannot be found.”

The UK is expected to reveal legislation next week to disapply some of the protocol. The EU Brexit chief Maroš Šefčovič, issued a statement on Tuesday warning that a renegotiation of the protocol was not an option as it was a “cornerstone” of the wider withdrawal agreement. If the UK proceeds to disapply the protocol completely, the EU has promised to take action including limited sanctions on British goods such as Scottish salmon and whisky or suspension of the entire trade and cooperation deal.

Recession risk

Last week the Bank of England forecast Britain’s economy would shrink and enter a recession in 2023. Now, there is a more dire warning from the UK’s National Institute of Economic and Social Research (NIESR) institute, which has forecast that gross domestic product will fall by 0.2% in the third quarter and 0.4% in the last three months of the year, marking two consecutive quarters of contraction. “Times are difficult for the UK economy,” said NIESR’s deputy director for macroeconomics, Stephen Millard.

EY Item Club has also forecast that the UK is under threat from a potential recession. They said that UK GDP is expected to grow 4.1% in 2022, 1.9% in 2023 and 2.2% in 2024, but there is significant risk of recession with households set to experience the biggest fall in real wages since 1977.

While the EY ITEM Club’s forecast does not see the UK economy entering a recession, it has warned that there is a potential that this could happen later in 2022 if consumer spending does not meet expectations, or if October’s energy price cap review results in higher bills. Consumer spending is expected to rise 4.9% in 2022, down from the 5.1% and 5.6% expected in March and February.

While consumer spending may benefit from households spending the almost-£180bn worth of savings (8% of GDP) built up during the pandemic, there is a significant risk that consumers may cut spending as their finances come under pressure. With the rising cost of living expected to affect households at various degrees, it is hard to see how the more vulnerable households will manage with the rising costs of energy bills and higher inflation.

The risk of a recession along with the negative Brexit-related headlines, will add pressure on the British pound and limit any gains for the GBP/USD pair.

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The pound is lower against both the euro and the US dollar following a stronger US dollar, as well as geopolitical and Brexit concerns. The main highlight for the week in terms of UK data will be the important inflation report this Wednesday which could support a Bank of England rate hike. With developments around Ukraine and January’s inflation data on the horizon, the pound could potentially be at risk. On Monday, rising fears of an imminent Russian attack on Ukraine triggered a global share sell-off and pushed oil prices higher.

Brexit

UK Foreign Secretary Lizz Truss has been criticised for granting too much ground to the EU in the ongoing negotiations over the Northern Ireland Protocol. In the latest round of talks, the Foreign Secretary is reported to have hinted that Britain would accept customs controls on goods intended for sale only in Northern Ireland. According to the Financial Times, the verbal offer was “so sensitive” it has not yet been put to paper. Truss’s latest concession about accepting some checks on trade within the UK contradicts the Government’s former position.

Pro-Brexit businessman and former MEP Ben Habib said that Truss’s suggestion represented a “complete collapse” in the Government’s position. Habib said: “If true, Ms Truss’s latest concession to the EU, to accept limited customs checks for goods from GB destined for use in Northern Ireland is a disaster.” He added: “It would signify a complete collapse in the British position and a preparedness to set in stone customs checks across the Irish Sea. Customs checks which the Government itself decried in its Command Paper last July.” The news, concerns over the Northern Ireland (NI) border checks and the lack of progress in the talks could weigh on GBP/USD prices.

PM Boris Johnson

Scotland Yard are in the process of contacting more than 50 people who have been present in the lockdown events in Downing Street. Boris Johnson has been contacted by the Metropolitan Police as part of the probe into lockdown parties held in Downing Street and across Whitehall. The formal questionnaire is understood to have been received after 9.30pm on Friday night. This could also add to political fears and weigh on GBP/USD prices.

Covid-19 and “Deltacron”

Another potential risk for the pound is news that health officials in the United Kingdom have begun monitoring a hybrid strain of the delta and omicron coronavirus known as "Deltacron" last week. While initially the mutation was dismissed, officials are now considering it as a real threat.  

Russia Ukraine tensions

Tensions between the two countries are high, with Washington warning that Russia could attack Ukraine at any time. Moscow has amassed more than 100,000 troops near Ukraine’s borders, while a senior Russian military official said on Monday that Russia was ready to open fire on foreign ships and submarines that enter its territorial waters.

BoE rate hike

The Bank of England will raise interest rates faster than previously expected to control surging inflation, according to economists polled by Reuters.

Sterling could rise on Wednesday when we get the release of inflation figures for January. Market participants expect a surprise on the upside and a more aggressive interest rate response from the Bank of England (BoE) over the coming months. CPI inflation is forecast at 5.4%, but investors have said a pleasant surprise on the upside could be a possibility.

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The pound rose on Wednesday following Boris Johnson’s announcement on Tuesday night that the government won’t be introducing new Covid restrictions before Christmas. Sterling was up against the US dollar and the euro. The prospect of new restrictions to contain Omicron, and the drop in trading at hospitality firms and retailers, had pushed the pound lower over the recent weeks.

No new restrictions before Christmas

Boris Johnson has confirmed that Christmas will go ahead without any restrictions on socialising, but this has sparked criticism that this decision will only lead to stricter measures later. The Prime Minister said that he recognised that families across England required certainty to spend Christmas with their families, but he explained that restrictions could still be imposed after 25 December because of the rapid spread of the Omicron variant.

The Prime Minister’s Christmas decision was different than the ones by the Scottish and Welsh governments. On Tuesday, Scotland said that Hogmanay street parties will be cancelled, while Wales announced £60 fines for employees who refused to work from home.

The number of reported Covid cases across the UK fell on Tuesday raising hopes that the recent surge may be starting to level, as there were 90,629 confirmed cases on Tuesday compared to Friday’s 93,045.

In a short video on Tuesday night, Boris Johnson said the situation with Omicron “remains extremely difficult but I also recognise that people have been waiting to hear whether their Christmas plans are going to be affected. So what I can say tonight is that naturally we can’t rule out any further measures after Christmas – and we’re going to keep a constant eye on the data, and we’ll do whatever it takes to protect public health. But in view of the continuing uncertainty about several things – the severity of Omicron, uncertainty about the hospitalisation rate or the impact of the vaccine rollout or the boosters, we don’t think today that there is enough evidence to justify any tougher measures before Christmas.”

Factors impacting on Sterling

As the Prime Minister noted, the possibility of new restrictions cannot be ruled out and will remain a headwind for the pound. This factor, combined with other reasons has limited the pound’s upside potential. The situation in the UK due to the rising number of Covid-19 cases, the potential of new restrictions next week and Brexit tensions have kept traders from buying the pound and limited any meaningful upside for the GBP/USD pair.

On the Brexit front, the UK Foreign Minister Liz Truss, who is now responsible for the Brexit negotiations, said that the UK’s position on the Northern Ireland Protocol remains unchanged. She added that the UK is prepared to trigger Article 16 if the role of the European Court of Justice as a final mediator in dispute-resolution in Northern Ireland is not reduced. Truss, who has taken over after Lord David Frost’s departure on Saturday, is seen by the EU as a more friendly and engaging counterpart. Frost’s resignation was met with relief by EU officials according to Politico. The former Brexit minister was criticised for its anti-EU, libertarian ideology. The bloc now hopes that Truss will be more determined to finish the talks on the protocol and focus on the relationship with the EU, countering Russia in Eastern Europe and the cyberspace.

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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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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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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 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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The pound fell early on Friday before strengthening, while the US dollar grew stronger. The British currency’s performance will depend on Brexit developments, but the dollar is expected to remain strong on expectations of a Federal Reserve rate hike by June 2022.

In regard to Brexit, Ireland’s Foreign Minister Simon Coveney said on Thursday that there is still time for a solution to Brexit's Northern Ireland protocol. The European Union is also planning to improve its offer to reduce customs checks at the Northern Ireland border.

In the coming weeks, Brexit minister David Frost will engage in intensive talks with the EU to reach an agreement. These positive developments have not yet impacted on the pound, but it will depend on investors’ focus as they turn away from Central Banks’ policies towards Brexit.

Brexit impact could be limited

Brexit anxieties have an immediate effect on the value of the UK currency and the possibility of the UK triggering Article 16 or any deterioration of the EU-UK relations could have a considerable impact.

Sterling may suffer if the European Union retaliates after a possible triggering of Article 16. However, economists believe that the negative impact of Brexit has been mostly price in the pound, so the effect of Brexit might not be as damaging to the currency as some analysts have suggested.

Also, as some other analysts have noted, any deterioration of the relationships or a suspension of the trade deal might not have significant economic effect. As ING’s James Smith and Chris Turner noted, “none of this necessary spells disaster for the pound.” They clarified that “much of the cost burden associated with Brexit comes from form-filling and customs processes, which are already in place. To qualify for zero tariffs under the current deal, companies need to prove that their products have sufficient EU or UK content to qualify, which can be very expensive in itself. In some instances where tariffs are low, it may already simply be easier to pay a tariff than document a supply chain.” They believe that any “additional economic effect of reverting to ‘no deal’ on top of that may not be as considerable as perhaps supposed.” For them, Brexit tensions will not change the Bank’s intension to hike rates, perhaps more gradually than markets initially expected. ING analysts highlighted that more crucial factors for the Bank remain the labour market and labour shortages.

How will the pound fare?

There is a possibility that the trade agreement could be suspended, but this will require further negotiations. The effect of leaving the single market and customs union last year was the major event, and economists argue that anything else happening now might not be as damaging for Sterling.

Obviously, increased uncertainty will hurt markets, but for some analysts this is not going to be as bad for Sterling as some have stated.

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