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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