A Guide to Brexit: deal or no deal?

What is the Brexit transition period?

The Brexit transition period started at the end of January this year after the Withdrawal Agreement was signed. During the transition period, the UK has remained in the EU customs union and single market. However, this will end on 31 December 2020, which is why the UK needs a free trade agreement with the EU.

The options for the UK’s trading relationship with the EU – how will this affect currencies?

A basic trade deal

In the case of a limited Brexit agreement, the pound could initially trade two or three cents higher against the dollar and one or two cents higher against the euro.

Then, further into 2021, the no-deal Brexit risk premia could disappear, offering sterling even more support, especially against the dollar.

No-deal:

Without an EU trade agreement in place, the UK would face enormous structural headwinds, which could push the currency significantly lower. We could expect the pound to trade below 1.30 against the dollar, and below 1.10 against the euro.

With either a limited agreement or none at all on offer before the year-end, frictions between the EU and UK over the details will undoubtedly continue with much political noise. There could be a last-minute compromise that as in 2019, avoids a no-deal Brexit.

What are the sticking points in Brexit negotiations?

Fisheries – how much access should EU boats have to UK waters? The UK argues that it should have complete control of its own waters as a sovereign country. However the EU says that if this is the case, the UK can no longer have special access to sell fish in the EU.

The level playing field – a set of rules that prevent businesses in one country gaining a competitive advantage over businesses in another. The EU would like this to be maintained if the UK is to access the single market and agree on a zero-tariff, zero-quota trade deal.

The Internal Market Bill (resolved) – in the latest Brexit breakthrough, the UK will withdraw clauses 44, 45 and 47 of the UK Internal Market Bill, so this sticking point has been resolved. It contained measures that will allow ministers to overrule parts of the Withdrawal Agreement. Some EU member states said that they would refuse to ratify a deal if the internal market bill wasn’t removed.

How important is an EU trade deal for the UK post-Brexit?

Prime Minister Boris Johnson has repeatedly said that the UK will “prosper” without a deal. A recent statement from number 10 said, “If the EU don’t respect the sovereignty of the UK, we will leave on Australian terms and the Prime Minister is confident that we will prosper.”

Despite this, Bank of England governor, Andrew Bailey, recently stated that, in the long-term, a no-deal Brexit could be worse for the UK economically than the coronavirus pandemic. He told MPs that “the long-term effects, I think, would be larger than the long-term effects of COVID” and added that a deal was in the “best interests of both sides”.

The UK government has prepared contingency plans in case no agreement is reached.

 What trade deals has the UK done so far?

The UK government signed a trade deal with Japan on 11 September that it said will generate £1.5 billion for the economy. Two-way goods and services traded between the UK and Japan is less than one-twentieth of the value of the EU-UK relationship.

The UK and Canada recently made an “agreement in principle” to continue trading under the same terms as the current EU agreement when the Brexit transition period ends. This allows negotiations to begin next year on a new deal with Canada. Bilateral trade with Canada is worth less than 3% of commerce with the EU.

A Canada style-deal is often looked at as a template for the UK-EU deal. However, let’s remember Canada’s trade talks with the EU began in May 2009 and an agreement was signed in October 2016 and approved and implemented in 2017. This supports the idea that a basic deal will be implemented by the end of the year and loose ends will be tied up throughout 2021 and beyond.