Will a trade deal give the pound wings?

The British pound made a step back on Thursday despite an interest rate hike. However, trade talks with the United States and a relatively small reliance on Russian energy could provide some fantasy in the near future.

With all the attention the corona pandemic and the Ukraine war are consuming, you could almost forget that just over two years ago, the Brexit negotiations reached a boiling point. It took some time, but Britain is finally building the trade network it envisioned when it said goodbye to the EU. A free trade agreement with New Zealand was signed at the end of February. Abolishing import tariffs and rules could increase mutual trade by 60%, the British government predicts. A similar agreement was previously concluded with Australia. Negotiations for a trade deal with the United States begin in Baltimore next week. A second round of negotiations is even planned for the spring.

Cold shower for Bojo
A good trade relationship with the United States was one of the spearheads of those in favor of a British departure from the EU. The flow of goods and services between the two countries is worth almost €240 billion per year. For Prime Minister Boris Johnson, however, it was a cold shower that US President Joe Biden was in no rush at all with trade talks last year. His predecessor Donald Trump had promised the British a very good trade relationship a few years earlier. If Johnson manages to get a nice deal this year, it will be a big boost for the British economy. That boost would be very welcome, by the way. The growth of the British economy is being slowed down considerably by all kinds of deficits.

Everyone back home
Many foreign workers have returned to their home countries. The shortage in the truck sector and at meat processing companies leads to supply problems and to the culling of much that was actually intended for slaughter. The shortage also causes the prices of all kinds of goods and services to skyrocket. In the course of the spring, inflation could rise to more than 8%. As happened yesterday in the United States, the British central bank has raised interest rates. In the United Kingdom, this was already the third interest rate hike in a row. Because the decision was not completely unanimous, the pound took a small step back. Despite this, the currency expressed in euros is worth almost 10% more than a year and a half ago.

Breathing pause or trend reversal?
However, that advance came to an end when the European Central Bank (ECB) last week advanced an advance on a faster rate hike than currency markets had anticipated. Still, the pound's pullback looks more like a breather than a trend reversal. It is not certain whether the ECB is actually prepared to step on the interest rate brake considerably and thereby also endanger the economic recovery. In addition, Britain is significantly less dependent on oil and natural gas from Russia than the eurozone. Finally, trade talks with the United States could also give the pound a boost. Despite the challenges facing the UK economy, it is too early to depreciate the pound before 2022.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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