Britain to Leave EU with Deal, Pound Soars

Created on December 31, 2020

British House of Commons approves Brexit deal; British pound rallies against competitors; British economy looks positive.

The British House of Commons approved the trade agreement with the European Union yesterday in a 521-73 vote, ending the Brexit saga just before the deadline.

The new trade rules are set to take effect on New Year’s day and found little opposition in Parliament, as leaving the European Union with any deal was preferred to a no-deal exit. Despite the overwhelming support, some Parliament members opposed it, among them Scotland’s First Minister Nicola Sturgeon.

Britain is now the first nation to leave the European Union after nine months of difficult negotiations. The deal guarantees the free movement of goods, services, capital and people, the restriction of the European Court of Justice from any potential trade feud between the two bodies, and zero tariffs and quotas, though some customs and regulatory checks are now becoming relevant.

25 percent of fisheries under EU control will be conceded during the first five-and-a-half years. After this period there will be periodic negotiations on this issue.

British Prime Minister Boris Johnson hailed Parliament’s decision, saying that the UK’s destiny now resides in the hands of the British people.

“11 PM on 31 December marks a new beginning in our country’s history and a new relationship with the EU as their biggest ally. This moment is finally upon us and now is the time to seize it,” Johnson said.

Economic Calendar

Very few relevant economic data have been published this week. Only the Nationwide Housing Prices Index for December was released, showing that it climbed by 0.8 percent, higher than expectations of 0.4 percent, though lower than the previous month’s 0.9 percent surge. Annualized, it rose by 7.3 percent, also higher than forecasts of 6.7 percent and over the previous month’s 6.5 percent.

British Pound Rallies

Given the recent announcement of the Brexit deal and the approval of the Oxford-AstraZeneca vaccine, the pound sterling has risen against all major currencies, as those announcements seemed to boost risk appetite among traders. The recent weakness of the dollar also played an important role in the pound’s appreciation.

Sterling gained 0.90 percent against the dollar, posting gains for the second consecutive day. So far this week, the currency has climbed by 0.80 percent, gaining for the third consecutive week and about to close the year in the positive territory.

The pound has been enjoying a gaining streak for three months, gaining 2.49 percent in December, after rising by 2.94 and 0.19 percent in November and October, respectively.

UK Economy in Good Shape, Inflation Data Disappoints

Since our last report, economic growth for the third quarter was revised up, now at 16 percent after a 19.8 percent drop in the previous quarter. Unemployment data have remained unchanged, signaling a positive situation in the labor markets.

According to the Treasury, the UK economy is set to rebound by 5.4 percent next year, provided that the vaccine rollout allows a return to normal. Despite being the biggest growth rate in Britain’s history, such a rebound is expected given the current circumstances.

“If you have a bigger, deeper fall in one year, you’re probably going to get a much quicker rise the next,” said an analyst at Nomura. “That’s how it works.”

Inflation data for November were way below the Bank of England’s inflation target, which currently stands at 2 percent. The Consumer Price Index missed analysts expectations, climbing by 0.3 percent annually, after rising by 0.7 percent in the previous period. In monthly terms, it contracted by 0.1 percent, also missing analysts’ forecasts, and underperforming the previous month’s figure.