If you hadn’t noticed, the United Kingdom has left the European Union. You could be forgiven for not having noticed because by design of the Withdrawal Agreement, nothing changes until the transition period is concluded. However, at the formal and legal level the departure has taken place: the UK’s flag has been ceremoniously removed from the European Council’s lobby; remainers have either found inner content, are now remourning or have become rejoiners. If nothing else yet Brexit has certainly developed the nation’s skill with the portmanteau… confined to the universe of ‘motel’ and ‘brunch’ we are no more! Although technically Grexit came first if you recall.
The final official words from the European Union to the UK as a member state might surprise you. Coming from the chair of an official meeting between member states a couple of days before the UK’s exit, the Croatian Ambassador (holding the 6-month rotating presidency) concluded the final engagement by fondly saying to the UK, ‘thank you, goodbye and good riddance’! The UK ambassador reportedly took the somewhat insulting conclusion of a 47 year long relationship in good spirits receiving reassurance the parting message was lost in translation and intended to mean good luck. Keep that excuse up your sleeve next time you’re caught whispering something under your breath perhaps!
Sterling tumbled to a six-week low versus the US Dollar yesterday as Johnson set out his position for trade deal negotiations. The Prime Minister called for a Canada-style trade deal to be constructed between the UK and the EU. The market was spooked by Johnson’s threat to walk away from negotiations if the EU insisted that the UK must be bound to the Union’s rules and concern built around what Johnson called an Australia-style trade deal. If you were wondering, Australia does not have a trade deal with the European Union. They have been in talks since May last year attempting to construct one and in the absence of progress on this endeavour they trade with each other based upon the 2008 EU-Australian Partnership Framework. This framework aims to boost trade by reducing technical barriers to trade but is fundamentally WTO trade with a touch of respect.
We should expect a tough line from Johnson at the start of negotiations in order to improve the prospect of the final trade deal. Nonetheless, the market braced yesterday and this morning by selling the Pound to react to unfolding events. Cable lost more than 2 cents yesterday from the price it opened at in Wellington, New Zealand to its close in London. The low we now sit on versus the Dollar is an important technical level. We have traded below this level at the end of November and subsequently touched this price floor four times in the two months of trading that followed. If this level is broken then ground opens up for the Pound to fall all the way to 1.20, the low reached in August 2019. Even if there is a retracement in the Pound in the short term, yesterday is a sign of the volatility to come during these negotiations.
Discussion and Analysis by Charles Porter