Welcoming 2021: part 1

bThe end of the year heralds forecast reports and years in review. Since we have never quite experienced a year like this one in all of Minerva’s history, we thought we would swerve the forecasts for this year, the only forecast that worked for us last year was GBP/USD. We were correct to predict that GBP/USD would trade around the $1.35 mark, although it was a bit of a roller coaster to get there. This leads nicely to the first part of our “welcoming 2021” report, where we will discuss the Brexit trade deal and the implications that it has for the trading year ahead. 

Banking on a deal 

It is still early days, but the announcement of a trade deal on Christmas Eve was a very welcome development and hopefully draws a line under fractious political debates, wrangling and name calling from both sides. Now, it would be nice to see more respectful debate in the political and media arenas as the UK and the EU navigate their post Brexit relationship. The first thing to say about the Brexit deal is that it has every chance of passing a UK Parliamentary vote on the matter on 30thDec. Some European newspapers seem to think that hardline Brexiteers could derail this vote and jeopardise this deal. While the ERG does not need to publish its membership, after last year’s election there were thought to be 60 members of the ERG. Even if every member of the ERG votes against this deal, it would still likely pass a Parliamentary vote since the Conservative government has a majority of 80. Added to this, it is unclear if every member of the ERG would vote against the bill, with some notable Brexiteers sounding positive on the deal. While Nigel Farage is not an MP, his opinion on Europe counts, and he sounded fairly happy with the deal in a tweet on Christmas Eve. Added to this, while we have yet to hear from the Labour leader Kier Starmer on the matter, there is a good chance that Labour will vote in support of the deal. Since the President of the European Commission personally took over as lead negotiator to get the deal overt the line, we would expect all EU nations to support the deal, so that it can come into effect from the start of the New Year. Thus, we would avoid any positioning for a shock failure to vote through the deal at the 11th hour, as the numbers don’t add up in the UK, and EU nations are also likely to support the deal. 

The main impact of the deal 

The deal mostly focused on the trade of goods. While UK hauliers will have trouble because they can’t stop off at more than one location to distribute goods, there are plenty of ways around this. UK Pharma could see some extra costs as European nations who buy UK drugs may have to conduct their own safety checks. Thus, we could see some softening in the UK health and pharma sector at the start of the year. However, UK approval for the new Astra Zeneca/ University of Oxford covid vaccine is due to be incoming in a couple of days. Since this vaccine is one of the easiest to store and administer, as well as being significantly cheaper than the Pfizer and Moderna vaccines, we could see a boost for Astra Zeneca at the start of the year and this may cancel out some of the negative sentiment around the impact of Brexit. 

Why finance can breath a sigh of relief 

Finance and the City of London still needs to be worked through, but the forecasts for hundreds of thousands of jobs being take from London and moved to Frankfurt, Paris or even Dublin has not materialised. We doubt if the City of London will lose its status as Europe’s financial centre. It remains second to New York for competitiveness, which is well above its European counterparts. Thus, those looking for the demise of London as a result of Brexit have been wrong-footed. Even a former head of the German Bundesbank said recently that London would remain the financial capital of Europe. Thus, financials also see an improvement in sentiment when trading resumes in London on Tuesday. 

Overall, this is merely the end of the beginning. The relationship between the UK and Europe will be a lot easier to navigate now that we have a trade deal in place, but there is still a lot to work through. Thank goodness the blessed fishing question has been solved, however, that represents 0.3% of GDP, getting more detail on the relationship between the EU and the City of London will be of much more importance to the long-term health of the UK economy and of the FTSE 100. We shall have to wait for more information on this important relationship, but it would be our guess that we will see more separation of business in the UK financial sector, with separate teams for European and rest of world business. 

Next steps for GBP/USD 

The other key question is what does this mean for the pound? The pound’s reaction to news of a trade deal was underwhelming, with GBP/USD dipping from $1.36 to $1.3530. We expect this to be temporary, and the pound could still see some more upside. We don’t rule out $1.40 in the next six months, however that will be dependent on more than just the Brexit deal, including a swift roll out of the covid vaccine for all age groups to enable economic life to return to normal. Read part 2 of our “welcoming 2021” report to find out more about our GBP forecast.