20 May 2025: Johnson insults the Brexit reset

The Government announced the agreement of a “reset” in its relationship with the European Union yesterday, and managed to alienate another sector of UK industry in the process.

The Prime Minister hosted EU Commission President Ursula von der Leyen in London at the first UK/EU summit and confirmed that an agreement had been reached a few hours earlier.

The landmark deal clinched between the UK and the EU to remove checks on food exports will add nine billion pounds to the UK economy and lower food prices. Keir Starmer said the deal, billed as a “historic” turning of the page, delivered the “reset” he had promised after winning the general election last July.

Starmer said the UK will grant the EU fishing fleet access to British waters for an additional 12 years and pave the way for removing checks on British food exports, allowing everything from the “great British burger to shellfish to be sold again with ease in the EU.

The UK “fleet” has been decimated over the years and has now become little more than a p(r) pawn in the negotiating process. Fishing, like farming and retirement, is considered a “negotiable” by this Government that considers itself untouchable, as it slowly erodes the fabric of “Britishness”.

The Opposition Parties viewed the deal with mixed emotions. Conservative leader Kemi Badenoch called the deal a "surrender" to the EU. Reform UK leader Nigel Farage said the deal "truly sold out our fishing industry, all in the name of closer ties to an ever-diminishing political union." The Liberal Democrats and Green Party gave the news a cautious welcome.

Alongside the limited deal with America and a broader deal with India earlier this month, there are now a trio of tie-ups for a government that’s faced headwinds as it searches for economic growth.

It does feel like the Government has tried to tiptoe through a minefield, causing as few explosions as possible. The Europhiles on the backbenches will consider the deal as being “too little too late”, while the Brexiteers fear that with more negotiations to come, it is the “thin end of the wedge”.

The deal also holds out hope for a return of the UK to the Erasmus university exchange programme, and the creation of a youth mobility scheme that would allow young people to experience the EU through work, study, Au pairing or travel.

British travellers will also be able to use European gates at airports, ending long queues to use the gates for non-European citizens. Pet passports will be introduced to eliminate the need for animal health checks on each trip, but those concessions hardly match the likely total decimation of the country’s fishing industry, which, despite being in decline, holds considerable significance for the country.

The pound briefly tested the 1.3400 level for the second time in two weeks. Despite an early bullish push in cable bids, buyers couldn’t lock in a fresh high, and price action trimmed back to a more sedate 1.3350.

Jerome Powell is entering the last year of his time as Chairman of the Federal Reserve. While he may not be considered one of the Central Banking Titans of the past fifty years, he has had to deal with considerable challenges which rival the issues faced by Volker, Greenspan and Bernanke, as well as a President who remains critical of his policy decisions.

So, as the central bank puts together its final framework under his leadership, it's useful to consider his legacy at the helm of arguably the world's most powerful financial entity.

Powell last week offered his thoughts on how the Fed's policy tools, communications and strategy may evolve over the next five years as the central bank prepares to release its new review later this year.

No one knows what the economic landscape will look like in a few months, never mind five years. But it's reasonable to assume that inflation, interest rates, policy uncertainty and macroeconomic volatility could all be higher than in the previous five.

This is a tough environment in which to effectively conduct and communicate monetary policy. In some ways, it's a mirror image of the conditions that prevailed during the Fed's last five-year review in 2020, which came after years of inflation undershoots and near-zero interest rates.

The Fed has an explicit dual mandate to implement policies that promote "stable prices" and "maximum employment".

In the years leading up to the inflation spike of 2021-22, the focus appeared to be tilted toward promoting growth amid fears of "secular stagnation". Indeed, in 2020, the Fed introduced a flexible average inflation targeting framework, allowing overshoots above the central bank's 2% target to compensate for years of weak, sub-target inflation.

This policy was effectively ended by the rise in inflation, which followed the measures introduced to combat the severe downturn caused by the pandemic.

No one expects the Fed to get inflation to exactly 2% and keep it there indefinitely, so averaging will always be factored into policymakers' decisions. There will always be arguments about what the maximum and minimum rates of inflation that the economy can comfortably bear.

The U.S. economy received some more bad news on Friday, when Moody's Analytics downgraded the United States' credit rating, noting the country's growing national debt, which is up to $36 trillion.

Treasury Secretary Scott Bessent was dismissive of the downgrade's importance, describing it as a "lagging indicator" and commenting, "Who cares?"

Who cares are the investors who will demand an additional rate of interest to carry the concerns of additional risk.

Bessent’s comments sum up in a nutshell the issues raised by Christine Lagarde recently when she said that the dollar's recent performance is due to “waning confidence.

The dollar index tested the bottom of its perceived range yesterday, falling to 100.14 as traders saw the possibility for the EU to retaliate against Trump’s tariffs as it strengthened its ties to the UK. However, it found a base and climbed to close at 100.54.

ECB President Christine Lagarde has reiterated her view that the Euro’s recent appreciation against the Dollar is “counter-intuitive,” but ultimately a reflection of growing global unease over US political and economic direction.

“Uncertainty is a constant in the US,” she noted, while Europe is being recognised as “a stable economic and political region with a solid currency and an independent central bank.”

That divergence in perceived reliability, she argues, has led markets to favour the Euro even in a climate where risk aversion would normally boost the Dollar.

In March, exports of goods from the Eurozone to the rest of the world amounted to €279.8 billion, an increase of 13.6% year-on-year. On the other hand, imports amounted to €243.0 billion, an increase of 8.8% year-on-year.

The trade surplus in March was mainly due to the surplus in chemicals and related products (€42.8 billion), which experienced a notable year-on-year increase of €19.6 billion. Machinery and vehicles also contributed positively to the region’s trade surplus, with an increase of €1.3 billion compared to March 2024.

Meanwhile, the energy products deficit showed a modest deterioration of €0.8 billion compared to the same month last year.

During the same period, other manufactured goods, food and beverages, and raw materials experienced declines in their balance of 2.7 billion, 1.6 billion and 0.6 billion, respectively.

Trade within the Eurozone amounted to 658.2 billion euros in the period, 1.2% more than in the same period of 2024. This is an area which Brussels is trying to expand

The ECB can be expected to be cautious with its rate path and continue its data-driven approach. There is much uncertainty surrounding President Trump's tariffs, which have made it difficult for the ECB to make inflation and growth projections.

What is clear is that eurozone growth has taken a hit from the tariffs and the outlook and the outlook for global growth has been revised downwards. The damage from the tariffs could be mitigated if the US and China can reach an agreement which removes the tariffs between them.

The uncertainty surrounding US trade policy has also pushed the Federal Reserve into a wait-and-see stance, despite Trump's loud calls for a rate cut. The Fed held rates at this month's meeting and is widely expected to stay on the sidelines again in June. The Fed is waiting for more clarity on the tariff front, but any surprises from inflation or employment data could have a significant impact on rate policy.

The euro rallied to a high of 1.1289 yesterday as traders looked to test resistance at 1.1300, but there were strong sell orders from exporters, which halted the rally and pushed the single currency back to a close of 1.1229.

Have a great day!