EUR/GBP under pressure amid Brexit tensions
The EUR/GBP fell for the second day in a row on Friday, as Brexit tensions eased through talks that will continue next week. The UK Brexit Minister, Lord David Frost, and the Vice President of the European Commission, Maros Sefcovic, said the discussions regarding the implementation of the Northern Ireland Protocol would continue next week and focus on medicine and customs. Sefcovic also noted that the EU was pleased by a welcome change in tone from the UK in the talks.
Since the UK officially left the EU in January 2020, several new trade arrangements have emerged. However, the agreements were looking to be under threat as the UK was complaining about difficulties in implementing the required checks on goods moving from Great Britain to Northern Ireland.
On Friday, the Brexit ministers, Frost and Sefcovic, met in London. According to the EU’s chief Brexit negotiator, there was an improved tone in the latest round of negotiations related to trade in Northern Ireland even as the UK repeated a threat to walk away from its post-Brexit commitments if a resolution couldn’t be found.
BoE kept the policy rate steady at 0.1%
Apart from Brexit, the Bank of England’s Governor, Andrew Bailey, said that there was a risk of more bottlenecks in the economy. Especially in demand for labor, which could fuel expectations of higher inflation. He further said that the BoE lacked the tools to control growing gas prices but monitored inflation spread throughout the economy. He proposed that the Bank of England intervene if it believes that higher inflation expectations will raise wages.
After last week’s Bank of England kept its benchmark interest rate on hold at 0.1%, these comments came in. BoE kept policy unchanged despite raising its inflation forecast to 4.5% by the end of the year and 5% by early 2022. Market participants expected a rate hike from the Bank of England, but the bank decided otherwise, ultimately weighing on the British pound.
UK Prelim GDP weakened, dragging the EUR/GBP to 0.8528
On the data front, the prelim GDP for the quarter from Britain dropped to 1.3%, against the projected 1.5%. Worse than expected, economic data weighed on the British Pond. The recovery of the British economy from its third COVID-19 lockdown slowed sharply over the summer. That’s primarily due to rising infection rates, global supply shortages, and higher inflation.
In the third quarter, UK GDP growth slowed sharply to 1.3% from 5.5% in the second quarter. The economic recovery of the UK lagged behind that of other rich nations in the third quarter, which underscored the interest rate dilemma facing the Bank of England.