Brexit: A Remarkable Shift in Tone
Over the weekend, when everyone in the world watched the outcome of the U.S. Presidential election, the United Kingdom signaled a shift in its tone regarding a possible Brexit deal. Coincidence or not, the signal comes at the same time as the United States prepares for a transfer of power.
A lot is at stake for the United Kingdom now that the United States has a new leader. Suddenly, the European Union and the United States relation is back on its track. The United Kingdom, by threatening to break international law in order to get Brexit done, has attracted criticism that alarmed the new U.S. President.
As such, the Prime Minister’s Johnson shift in tone is not surprising. He expressed his desire for a trade deal to be reached, and under the new administration in Washington the chances are that we will see it happen sooner rather than later.
The new administration in the United States is more likely to hold the U.K. accountable for any attempt to break international law. Therefore, the message sent by Johnson over the weekend fuels the hope of a deal to be reached.
The GBP and Brexit
Ever since the Brexit referendum, the GBP has traded without a clear direction. It did drop against the USD from 1.50 to 1.15, but other currencies fell against the American one as well in the last four years. For instance, the Euro also fell from 1.25 to 1.07 before bouncing in 2020 as the Fed improved the USD liquidity.
The best way to interpret Brexit and the possible trade deal is to look at the EURGBP exchange rate. Unable to move from the 0.90 level, it simply reacts to every single piece of news related to the Brexit negotiations.
Normally, a trade deal will boost the GBP and send the EURGBP lower. So far, at least, any positive news sent the GBP higher, while any news of a “no deal” sent it lower. If there is a deal, in the end, the EURGBP has more room to the downside than there is room to the upside should no deal come.
Another interesting perspective comes from monetary policy. The Bank of England already eased more by increasing the quantitative easing program. Yet, the move did not affect the GBP. However, the ECB is next to move, and if it goes big, the EURGBP should break the 0.90 level decisively.