26 May 2021: Brexit friction growing

Brexit friction growing

26th May: Highlights

  • Sunak pins hopes on strong recovery.
  • U.S. economy faltering as demand sags.
  • Weaker economies demand taps stay fully open

Northern Ireland row and insurance market drive rows

As was mentioned yesterday, the UK Government is beginning to turn its attention on issues that have been paused while the country was in lockdown during the Pandemic.

There are several outstanding issues over the Brexit trade deal with the Irish Protocol having the most potential to bring about a major disagreement.

EU Commission President Ursula von der Leyen has already stated that tensions in Northern Ireland recently owe less to the protocol and more to the concept of Brexit itself. That comment neatly abrogates responsibility for Brussels intransigence over the apparent separation of Northern Ireland from the rest of the UK.

In the eyes of Loyalists and Unionists the protocol that is still subject to full ratification is designed to push the north into the arms of Dublin.

Calls for the protocol to be scrapped won’t be heeded according to von der Leyen.

The country’s passage towards a complete reopening has hit a significant snag as despite the effectiveness of the two most popular vaccines effectiveness against the Indian Variant, cases are beginning to rise in several areas of the country.

This is beginning to influence Government thinking over the complete withdrawal of restrictions and the situation is so fluid that the Government is beginning to provide guidance on an almost daily basis. This is leading to further confusion particularly about domestic and foreign travel,

Figures released yesterday show the true impact of Brexit upon the UK’s trading relationship with nations of the EU. While it is obvious that the Pandemic has increased difficulties, Trade in goods fell by a little over 23% in the first quarter of 2021 when compared to the last data available before either Brexit or the outbreak of Coronavirus.

The Government will want to see more data before deciding whether to provide support.

The pound is struggling to make headway against either the dollar or euro and may be starting to run out of steam as doubts are raised about the pace of the recovery. Yesterday, it failed to break above resistance against the dollar and fell back to a low of 1.4115, eventually closing barely changed at 1.4153.

Versus the single currency, it has been trading in a relatively narrow range recently. Yesterday it lost ground falling to a low of 1.1531, closing at 1.1550. Major support is around 1.1470/80 and that may be challenged if the covid situation looks like worsening again.

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Employment data sending out ripples

The level of risk appetite in the financial markets is being hit by recent data releases in the U.S. which ironically back the Fed’s determination to hold monetary policy where it has been during the Pandemic to allow the stimulus provided by the Administration to permeate the entire economy.

Inflation remains the most influential topic with many still feeling that the FOMC will be forced to act to curb rising prices, no matter the reason for the significant outstripping of supply by demand.

Several prominent members of the FOMC have commented that inflation will not last long and there are a series of one- off factors due to the lifting of restrictions, affecting the situation.

The most recent data for employment, the latest data for which will be released at the end of next week has brought into the minds of analysts and commentators the thought that the recovery may burn bright for a short time but eventually dim as the true effect of the Pandemic and the pace of recovery come to the fore.

Throwing money at the problem has brought a significant improvement to retail sales data as people were emboldened to rush out and spend.

Now that has happened and the stimulus is in the economy, businesses are preferring to take their newfound cash flow and sit tight rather than invest in a restructuring of their operations.

This has led confidence indicators to fall as both PMIs and consumer confidence take a hit.

This may only be a temporary issue as the economy shifts into full recovery and the public see progress towards a full recovery but for now, risk is definitely being shunned in the market.

The dollar index remains weak and yesterday the fact that the Fed is unlikely to change its policy pushed it to a low of 89.53 and it closed at 89.67. It remains to be seen if the decline accelerates with the break of support at 89.80.

But the EU meek with Belarus

Ursula von der Leyen has had a tough first year or so as EU Commission President. Attempts to act tough have backfired spectacularly yet she remains determined to attack soft targets and try to deflect blame away from her team.

Her failure to get what she wanted from the vaccine manufacturers despite threats of spurious legal action have not deterred her and her blaming of the UK Government over the issues being seen in Northern Ireland and shifting the blame away from the protocol to blame discontent over Brexit itself are laughable.

Continuing to look west from Brussels when a major diplomatic issue has developed behind her typifies the Commission’s anger with the UK and its inability to form a coherent foreign policy.

The determination to try to ensure that any benefit that the UK accrues will not be seen as being at the expense of the EU clouds just about every policy decision.

The hijacking of a commercial flight travelling between Athens and Vilnius as it passed over Belarus has drawn possibly as meek a condemnation from the EU as it is possible to make.

The EU has formed something of an alliance with Moscow that has led to security for the flow of gas from Russia to the Union but also allowed the Putin regime to gain a degree of influence.

Promising more sanctions than banning the Belarussian national airline from travelling to EU airports while buying time to consider further action is a fairly predictable response.

On a brighter note the recovery in the EU economy appears to be gaining pace with estimates of positive GDP growth beginning to emerge.

As expected, Germany will lead the way expecting a rise of 2.4% in the second quarter alone. There is still no reason to expect the Eurozone to reach its pre-Covid level before the start of Q2 of next year but there is a distinct feeling of optimism.

This could still be shattered if the south of the region is unable to see a full return of tourists this year and the question of financial support is still far from certain.

The euro continues to rally versus a weakening dollar. Yesterday it broke out of its recent range climbing to a high of 1.2266 and closing at 1.2249.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”