In December, the European Union and the United Kingdom agreed to a new trading relationship. The Brexit ended a 47-year relationship. The deal between the EU and the UK established zero tariffs on European and UK products, but it has put up new barriers to the flow of goods, including new paperwork and customs checks. According to the UK’s tax agency, the EU’s deal adds £7 billion to business costs. While most of these costs were priced into the market, the relationship changes are likely to generate an impact that has yet to be calculated. In early January, currency trading of the pound remains stable versus the Euro but has continued to rally versus the US dollar.
How Will the Agreement Impact Trade?
The New Year will bring additional costs of doing business for both UK and EU concerns. Firms on the continent and the Island have been told to prepare for the new regime relating to goods’ trade. The UK government has published hundreds of pages explaining what companies must do. However, the EU’s agreement only came seven days ahead of its implementation. It will take time for firms to adjust to the new information.
How Will It Impact Trading
There have been swift changes to some of the UK equity trading rights. For example , London lost on December 31 it’s right of accessing the single market and investors inside the EU block were not permitted to trade shares in various companies such as Airbus SE and BNP Paribas SA from the UK for example. It’s unclear whether the EU will be granting trading rights through the equivalence process. After the struck of a Brexit trade by Boris Johnson deal made on December 24, the two sides dead-lined March and outlined for a memorandum of understanding around the regulation deadline of financial services, a vital driver of the UK economy.
Now that the deal is complete, the UK appears to have lost some of its leverage as it pertains to financial trading. The service sector in the UK dominates growth. Services drive approximately 80% of the GDP in the UK. The Financial industry makes up the bulk of this revenue. The UK financial sector is the second largest in the world. In 2018, the financial services sector contributed 132-billion pounds to the UK economy. This growth was nearly 7% of total economic output.
The Pound and UK Stocks
Despite the uncertain of how the Brexit will impact UK economic output, the pound has remained stable versus the Euro. Since the agreement’s announcement in late December of 2020, the pound has traded sideways versus the Euro. The pound also closed 2020 at a 2.5-year high versus the US dollar. What appears to be clear is that the Brexit issues have been priced into the value of the British Pound. Riskier assets like stocks have also remained strong. On the first trading day of 2021, stocks consolidate some of the gains experienced in 2020 but remain elevated.
Looking Forward
Several issues need to be rectified as the EU and UK move forward with Brexit’s financial matters. Trade is the top priority. Financial services will play a large role in determining if the UK can continue to remain the world’s second-largest financial capital. Since the Brexit deal’s announcement, the pound has remained strong and riskier assets have continued to trade at elevated levels. Unless there is a surprise, financial UK assets are likely to continue to stay buoyed, trading in tandem to other riskier investments.
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