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 British Pound dropped, losing all the recent gains after global stock markets fell.  Analysts, however, hope that the vaccine rollout will help offer some support, thus limiting the pound’s losses. 

As mentioned in our previous article on the pound, the British currency is influenced by wider market trends and sentiment, which has recently become more obvious, once the Brexit negotiations were completed. This is going to become the default scenario in 2021, which will see the pound rising against major currencies when markets are going up, and, on the other hand, see it falling when global markets are underperforming.

On Wednesday, the pound reversed its gains after global markets fell and investor “risk off” sentiment drove equity and commodity markets to fall, and the dollar to strengthen. There was no obvious reason behind the decline and analysts believe that a fall in stock markets is expected, as more traders close their trades. In a report from Reuters, it was noted that traders were making leveraged trades taking profits to cover losses from other trades, leading to significant falls in overcrowded trades. Additionally, increased trading volume in certain sectors of the market created volatility.

Slow vaccine rollout disappoints

Markets appear to have been too optimistic about a quick economic recovery based on the prospect of vaccinating billions of people. According to CNBC, “a sluggish rollout of the Covid vaccines  threatens Wall Street’s rosy outlook.” In the UK, the pharmaceutical giant AstraZeneca continued on Thursday its dispute with the European Commission, after telling the bloc last week there would be a 60% shortfall in supplies due to production problems. The dispute could trigger a UK-EU trade war amid frustration at the speed of the vaccine rollout in Europe.

In an interview with Euronews, German MEP Peter Liese said that it was unfair the way European citizens were treated by the UK pharmaceutical company:

"For five weeks now the BioNTech vaccine that is only produced in Europe, that has been developed with the aid of the German state and European Union money, is shipped to the United Kingdom. So people in the United Kingdom are vaccinated with a very good vaccine that is produced in Europe, supported by European money. If there is anyone thinking that European citizens would accept that we give this high-quality vaccine to the UK and would accept to be treated as second class by UK based company. I think the only consequence can be to immediately stop the export of the BioNTech vaccine and then we are in the middle of a trade war. So, the company and the UK better think twice.

In relation to the demand for more vaccines, Barbara Rockefeller of Rockefeller Treasury Services Inc. noted that “We were all so enamoured of the blazingly fast development of vaccines that we neglected to consider production bottlenecks—and were misled by company and government announcements alike that the stuff could be produced on demand. It seems we really do have a global shortage of vaccines that will persist for many months.”

If the vaccine rollout continues smoothly and more vaccines become widely available, then the pound will rally. However, the lack of vaccines and a possible trade war between the UK and the EU could threaten the British currency.

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