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The impact of trade deals on the GBP

Studies among economists suggests that by 2030 the UK economy will be about 4-6%  worse off than had it stayed in the EU. Main reason? Higher trade costs with its closest neighbour the EU.

It’s not surprising then that the UK is working hard at establishing new trade deals fast to counteract those predictions. With a negotiating team larger than in most countries the UK is looking to close deals with Australia, New Zealand and the US quickly. And that’s despite already closing a deal with the world’s third-largest economy in September 2020: Japan. The UK also managed to clinch a deal at the 11th hour with the EU in December 2020.

Whilst the departure of President Trump from office was bad news for a quick US-UK trade deal the question remains: of what benefit are those trade deals to the UK and what impact will they have on the value of the Pound?  

Who is next?

Whilst a quick UK-US trade deal would look great for Boris Johnson’s cabinet it seems more likely that the UK will close a deal with Australia first.

What would that mean for the Sterling? We obviously can’t say for sure, but we can take a look at what the Pound did when the last two deals were announced and what factors have seemed to make an impact.  

What happened when the UK signed a deal with Japan?

The first and most obvious reaction to a trade deal is to assume that it will lead to the rise of the currency in question. But that’s not quite what happened at first when the UK signed a deal with Japan.

If we go back a year to April 2020 the Pound was worth about 134 Yen. In the lead-up to the deal taking place, the Pound rose to 141 Yen in early September and then quickly dropped back to 134 Yen post the announcement. Since then it has steadily risen to a high of 153 Yen in April 2021.  

Why did the Pound drop around time of the announcement? Some suggest that this could be due to concerns that the deal favoured Japan more than Britain. As any trade deal goes there are pros and cons to each side. Only time will tell which nation will stand to benefit more out of a trade deal, but investors often like to speculate and take a view on who is more likely to take advantage of the new arrangements in the short term. Japan’s strength in technology was certainly of concern to investors and could have been one of the many factors why they thought the deal would favour Japan more and hence initially weakened the Pound. 

What about the UK-EU trade deal?

Interestingly, we can see a similar pattern emerging when looking at the last year of data between the UK and EU. 12 months ago the Pound bought about 1.15 EUR. As the possibility for a deal was looking less likely and as the UK economy was hit hard by the pandemic the Sterling lost a lot of ground against the EUR and hit a low of 1.08 in September 2020.

When whispers and hope for a trade deal reignited in November 2020 the Pound rose back to 1.12EUR. The period of the announcement saw a lot of volatility for the GBP/EUR pairing, but has since then been on a slow but steady path of recovery and is currently sitting between 1.15 with a recent high of 1.17. Some analysts say the Pound is due to crash, others hail its fast vaccine roll out as a reason to be more optimistic.

What about the next deal?

It’s always important to remember that a trade deal announcement is only one of many factors when it comes to currency value. Fiscal and Central Bank polices as well as vaccine roll-outs all play a major part in a currency’s current value.

For traders, FX volatility is always of high interest, and trade deal announcements certainly play a big role in currency volatility.

As the UK is keen on closing important trade deals with some very big trading partners in the coming months and years we can expect a high level of GPB volatility around the time of any major trade deal news or announcements.