The GBP has faced huge challenges this year; the finalisation of Brexit in January, some of the worst COVID-19 cases loads on the planet with the UK on a per capita basis in the top 3 most effected and then there is the finalisation of the Free trade agreement with the EU once the translation period is over on the 31st of December.
We have been concentration on the final straights of the Brexit deal from a GBP perspective and specifically EUR/GBP cross. What has been interesting from a volatility perspective is that politics is never far away from moving the dial in this cross and each side of the channel has an agenda that they don’t want to move from for domestic policy and political reasonings.
Here are political points for both sides:
• The EU is worried the UK will give financial help to its own firms, which it says would give them an unfair advantage.
• The UK is concerned about who will be allowed to fish in its waters – the Netherlands, Belgium and France are very concerned that the English Channel and water in the North Sea will become ‘bordered’ and fishing will be impinged.
• The EU fears the UK is trying to change an agreement made about the complicated case of the Northern Ireland border known as the Backstop – the only part of the UK to have a land border with the EU. Could this be used as a backdoor for trade and movement of people against EU policy and interest? That is the question Looking at EUR/GBP over the past 2 months the chart shows that the moving averages and the trend is to the downside over this period. It’s on the belief the FTA will be reached as both sides of the channel benefit from FTA due to the interconnection between the EU and the UK.
However, two events have broken this trend in the past 7 days. First is France, the Netherlands and Belgium really digging in over fishing rights in the Channel and the North Sea. France in particular is concerned by what concession the UK might get.
Second, and more extraordinary is the reaction to the UK becoming the first the country in the world to roll out a COVID-19 vaccine. One would have expected this to be met with bullishness, instead it has been met with concern and a belief its being rushed. The clear long EUR/GBP breakout has caught a lot off guard as most had expected a vaccine to be a bullish call not a bearish catalyst. We will watch this development with interest as other countries join the vaccine line.
Returning to Brexit thought, the trend was for an FTA to bring the GBP some bullish sentiment – something that we believe should return all things being equal, but know it’s not when COVID is involved.