A trade deal was agreed but negotiations won’t stop there
Although both sides have come to some agreement on trade, Brexit isn’t quite over just yet as we look towards the new year.
While there is an agreement for zero tariffs on trade of goods, just be reminded that there is no agreement whatsoever on services – and that includes financial services.
As things stand, the Commons will vote on the Brexit deal on 30 December with the EU set to also ratify the deal some time in early January (presumably next week).
All that is a formality but thereafter, we are likely to see further negotiations to try and broker a deal on financial services. That said, expectations are low for anything substantial.
What does this all mean?
The market isn’t likely to care all too much from hereon about how negotiations will play out on financial services – at least not as engrossed as they have been with trade, considering that the expectations now are set to a bare minimum.
As mentioned last week, this trade deal while on paper sounds great, isn’t going to be the saviour of the UK economy. This just means that things aren’t that much worse, with the fact that both sides managed to avoid a no-deal outcome.
As for the pound, the reaction so far has been a bit telling. The inability for cable to crack the December high of 1.3624 previously could be a sign of things to come for the pound, especially once investors have more time to digest everything else.
This Brexit deal is lacking in more ways than one and it will reflect poorly on UK economic prospects moving forward, adding more reason for the BOE to ease policy further.
The lack of any near-term reprieve (although market conditions are still thin) could be building towards a ‘buy the rumour, sell the fact’ play but it could also be alluding to more subdued prospects for the pound next year.
If anything, I would expect this kind of sentiment i.e. downside for the pound to be better reflected in EUR/GBP, GBP/AUD and GBP/NZD perhaps.
So yes, we’ve gotten over trade negotiations but there will be more to follow on financial services surely next year. That said, the market isn’t likely to care all too much as this is the sort of “base case” scenario since 2-3 years ago.
Meanwhile, the pound may have scope to push higher against the dollar but could find itself in troubled waters against other major currencies considering how little this Brexit deal really does for the UK economy as a whole over the next few years.