Following a disrupted weekend with vaccine trade talks, sterling has managed to come out on the front foot as PM Boris Johnson and ECB's Ursula von der Leyen discussions rectify a potential vaccine trade war.
Over the weekend the UK have announced their intentions to join the Asia-Pacific free trade pact called The Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP. The bloc includes; Australia, Canada, New Zealand and Japan along with 7 other nations. The pact covers around 500 million people and makes up for 13% of the world’s income. Significantly Donald Trump pulled the US out of the trade bloc during his Presidency, but Joe Biden has hinted at a return, which would mean the UK could quickly have a free trade deal in place with the US through this method.
The UK in the CPTPP would still be free to strike trade deals elsewhere and with regards to food standards countries are able to agree their own terms within the bloc, providing considerably more flexibility than the EU trading agreement.
This week will be busy for sterling with a host of data, including PMI Manufacturing this morning which provides a sentiment into production over the coming months. The main highlight of the week will however sit with the Bank of England’s interest rate decision on Thursday. There isn’t expected to be any change to the rate at this point, however, talk of 0% or negative interest rates has been floated about in the past few months whilst the pandemic has taken effect. The statement and questions answered by Governor Andrew Bailey following the decision will provide insight into the central banks thinking, which in turn could cause market movement. If you are looking to trade this week using sterling this Thursday’s events are certainly something to be aware of.
European Commissioner Ursula von der Leyen found herself very much in the firing line over the weekend. The EU had said they will look to trigger an emergency provision in the Brexit deal that means they could control vaccines going across the border between Ireland and Northern Ireland. The whole premise of the Brexit deal and arguably why it took so long to negotiate was how to keep the two Irish nations borderless, at the first sign of trouble the EU announced they would introduce checks on the border.
Article 16 in the Brexit deal allows either the UK or EU to suspend any aspect of the trade deal which may be causing “economic, societal or environmental difficulties”. The EU are going to receive considerably less vaccines than they initially ordered due to production issues and are considerably behind the UK for vaccinating the population. Their immediate solution was to stop the vaccines leaving Europe for the UK, making sure no vaccines managed to get to the UK across the Irish border.
Causing alarm Boris Johnson and Ursula von der Leyen spoke on Saturday evening and agreed that any contractual agreements countries have in place with pharmaceutical companies should not be blocked. The EU have now back tracked and will not invoke Article 16, but it has left a very bitter taste in the mouth for many. Tory MP’s took the chance to point out that this is the exact reason why we left the EU, due to the attempt of the Commission to control sovereign dealings even Tony Blair branded the EU “foolish”.
The impact of Coronavirus saw the US economy shrink by the largest amount in 74 years, shrinking by 3.5% across 2020. On a positive note however the economy in the final three months of 2020 saw the economy grow at a annual rate of 4%, suggesting moving into 2021 the US could recover their losses quickly permitting the vaccination program is effective. During the same time period the S&P 500 index (US 500 largest companies) saw an increase of 16% which suggests investors are optimistic for the future.
Joe Biden is hoping in the coming weeks to get his $1.9tn package approved through the Senate which would see every American receive a cheque for $1,400, topping up the $600 approved last month. Biden is also hoping to double the minimum Federal wage to $15 a hour which could also face fierce objection from the Republicans in the Senate. However the Democrats by virtue of VP Kamala Harris’s tiebreaking vote have control of the Senate and House of Representatives so Biden should be able to get his policies through.
Biden like many expected is going to significantly increase the amount of spending in the US with a real focus on welfare and social standards. At this point markets are seeing this as a real positive providing the population with increased spending power and fuelling capitalism. However in the longer run the federal debt will be something that the Federal Reserve will have to keep an eye on. Increases in interest rates are often a key catalyst for strengthening a currency, however it is unlikely with a increasing government debt the Federal Reserve will be rushing to do this.
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