It’s safe to say that BREXIT was - and still is one of the most polarizing issues of modern British political history. Its impact on the future of the UK economy cannot be comprehended by any economist, it is not even worth trying to predict, however, you MUST understand how it will affect you as current or prospective LITA traders knowing the macroenvironment and knowing what to expect will help you immensely when making decisions that affect your portfolio and your other assets.
Many people who follow the news will know that there are ongoing talks between the EU and Britain on the future trade relationship that the two powers will have. With the deadline for the end of the year talks have reached a fascinating stalemate, this article will give you all the key information on everything to UK – EU tariffs to the UK’s broader economic plans so stay tuned.
Boris, the man, the myth, the Prime Minister has cut a controversial shape in the International trade and relations arena ever since his appointment as foreign secretary under Theresa May in 2016. Now as Prime Minister he has the thankless task of trying to forge a new trade deal with Michel Barnier and the EU Commission.
Boris has repeatedly flirted with the idea of a no deal Brexit; this would mean that the UK would go back to trading with the EU using the World Trade Organisations (WTO) terms of free trade.
Boris has stated that if he cannot get a Canada style trade deal with the EU, he will go for the WTO option. An example of the WTO’s terms in action is the deal between Australia and the EU, with higher Tariffs this trade deal is definitely not ideal for the UK as it means much higher taxes on goods but it works for countries like Australia who do not Trade in huge quantities with the EU.
Okay, but what does this all mean for my analysis?
Don’t worry, your questions will be answered momentarily, in a no deal scenario WTO Tariffs would be applied on the 1st of January 2021 some examples of these terms are:
The EU’s average WTO tariffs are 11.1% for agricultural goods, 15.7% for animal products and 35.4% for dairy.
British car makers would be hit with a 10% tariff on exports to the bloc, which could amount to €5.7bn per year. That would increase the average price of a British car sold in the EU by €3,000.
Currently, trade between the UK and EU is tariff-free. But the CBI (Confederation of British Industry) predicts that no-deal would mean that “90% of the UK’s goods exports to the EU would be subjected to tariffs.”
Many economists and journalists do believe that leaving with no deal would be detrimental to the UK economy, the head of the WTO Roberto Azevêdo reportedly told the PM that “WTO terms would slow the UK’s COVID recovery” and that “sticking to a closer agreement to the current deal would be better for Jobs”.
The EU is one of the UK’s biggest export Markets with countries like Germany (9.81%) and the Netherlands (7.17%) being some of the biggest destinations for UK exports after the US.
We all know that a deal would be preferable to no deal in terms of BREXIT, however this deadlock has proven to be the main issue for the PM. German chancellor Angela Merkel has sated that she believes the EU should make a move toward the UK in an attempt to keep the wheels turning as many political and economic figures such as the Irish foreign minister Simon Coveney and analysts at Danske Bank A/S comment that if talks move into November with out a deal it could be detrimental to the pound.
A lot of what is being said especially by members of the EU and UK governments is going to be Political posturing as they look to positioning themselves for future trade deals and elections, this does not mean they do not have an affect on the Markets.
EURGBP vs BREXIT:
As you can see from the chart above the Brexit saga has caused bullish moves for over 4 years on the pair EURGBP, meaning your buying the Euro and selling the Pound. You can see that even before the strife caused by the pandemic the trade talks had caused the pound to weaken significantly, this trend could be continued if we see a no deal Brexit and we may see a big strengthening of the pound against the Euro if they can push through multiple trade deals and get the EU trade deal over the line.
With deals with the US and the middle east still to come for the UK this is not the end of the pounds strength discussion, Johnson needs a deal with the EU for a second election, if he doesn’t manage to get one the Opposition in Parliament will use it to gain back a lot of the seats they lost in the last election restricting Boris and what he wants to do, for the economy an EU deal would mean security and less uncertainty but as LITA traders volatility is our friend, however, it would be overly risky to bet on EURGBP or a lot of other pairs that involve these two currencies as we do not know which way this will go, i would advise waiting until at least January 2021 before opening a positions that could be affected by BREXIT. There is no way to know for certain which way this will go only that there’s profit to be made either side!