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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