A last-minute Brexit trade deal has been reached just before the Christmas. the outcome is largely inline with our expectations. As a no-deal Brexit is avoided, BOE should be able to keep its powder dry for the year to come. The chance of negative interest rate has also been reduced, barring unanticipated bad news related to the pandemic. Given the lack of surprise in the deal, we also expect limited upside for British pound.
The most important areas of the deal are trade, level playing field, enforcement and fishing rights. The Free Trade Agreement (FTA) will ensure “zero tariffs and quotas on all goods that comply with the appropriate rules of origin”. Concerning trade in services, the deal is somehow better than WTO provisions in areas such as facilitation of short-term business trips and temporary secondments of highly-skilled employees). However, it does include the automatic mutual recognition of professional qualifications or passporting rights for financial services.
Level playing field was one of the stickiest issues of the negotiations. Eventually, the UK and the EU agree to maintain “high levels of protection in areas such as […] social and labour rights, tax transparency and State aid, with effective, domestic enforcement”. The deal includes a “binding dispute settlement mechanism and the possibility for both parties to take remedial measures”.
On fishing rights, the EU’s access to UK waters drop by 25% over 5.5 years. This appears a big concession when compared with an 80% decline over three years that the UK initially requested. While fishing only contributes to 0.2% of the country’s GDP, this is more political then economic.
The UK parliament will ratify the agreement by December 30, a day before the end of the transition period. The European parliament has declined to vote on the deal this year due to the lack of time for scrutiny. Instead, the European Commission has proposed to provisionally apply the deal until February 28, 2021, while the members are scheduled to later in January.
Reaching a deal by year-end is a base case for the market. Indeed, recent rally in British pound over the past weeks suggests that the good news has already been priced in. Certainty, vaccine news is another driver for GBP’s strength. Since there is lack of surprise from the deal, we expect limited upside for GBP. Downside risk is, however, resurgence of coronavirus cases and problems of vaccines.