The British Pound has been on the rise since yesterday, as Rishi Sunak has accomplished something that his predecessors were unable to. Traders have a lot of hope that now that the most difficult aspects of Brexit have been resolved with the E.U., the relationship between the E.U. and the U.K. will reset, and prosperity will flourish once again for the U.K.’s economy, which will pull the Brits out of their crisis with their living costs. As a result of the self-inflicted wounds being so severe, market participants are uncertain as to how long the current optimism will last.
Even though it has been almost three years since Brexit occurred and the United Kingdom exited the European Union, the concerns with commercial barriers in Northern Ireland are still unresolved. Yesterday, the British Prime Minister, Rishi Sunak, was successful in overcoming these trade restrictions and reached an agreement with the European Union on a pact that is being referred to as the “new Windsor Framework.” In spite of the fact that the Prime Minister of the United Kingdom referred to his achievement as a “decisive breakthrough,” no member of his own party in the British Parliament has made a big deal out of it. Since the new agreement establishes separate “green” and “red” lanes for different types of trade routes, products that are not leaving the United Kingdom will go via the “green” lane and will not be subject to the challenges of cumbersome paperwork and complicated customs procedures. The products leaving the United Kingdom will be required to go via the red lanes. As part of the agreement, adjustments to excise taxes and value-added taxes in the United Kingdom will be implemented in Northern Ireland. Medicines approved by the U.K. will be accessible in Northern Ireland immediately, with no interference from the E.U.
Currency traders have been wagering for weeks, and they have been suspicious that Rishi Sunak would be able to get the deal done since the specifics of the agreements weren’t given before the real announcement. Given that British Prime Minister Rishi Sunak and European Commission President Ursula von der Leyen have finally reached an agreement, the value of the Pound has risen for the second day in a row versus the dollar.
Since investors anticipate that the agreement would enhance economic circumstances between the United Kingdom and the European Union, the value of the euro has also increased to a good degree.
Unfortunately, there are still several obstacles to overcome, and because of this, Sterling is unable to make considerable progress at this time. To begin, it is imperative that this agreement get unanimous approval from the House of Commons of the United Kingdom. That vote is scheduled to take place within the next week at some point. The market is apprehensive since previous agreements have been voted down by parliament. Also, the Democratic Unionist Party (DUP) in Northern Ireland could attempt to place some obstacles in the way, but Rishi Sunak has made it very plain that this is one of his least concerns at this point in time.
If the DUP party does not agree to accept the deal, Sunak’s own party may try to back out of the whole transaction altogether, making the approval of the DUP party absolutely necessary from a commercial point of view.
When it comes to the pound sterling, currency traders need to keep in mind another essential fact: inflation in the United Kingdom is far from being its normal level and will not change anytime soon. This is an essential aspect. To cushion the effect of an economic downturn, the Bank of England does not have any advantageous choices available to it. The Bank of England is largely anticipated to keep raising interest rates for the time being, which will only make the current economic downturn linger for a far longer period of time. In point of fact, the majority of economists believe that the economy of the United Kingdom will experience the longest period of recession throughout the whole of the European Union. This is something that is quite likely to have a negative impact on the value of the Pound.
In conclusion, the path of least resistance for sterling may be skewed to the upside, but gains are most likely to stay minor.
