Brexit in a week from 3/2 - 9/2/2020

Hardly had the UK left the EU formally, Prime Minister Boris Johnson began last week with strong rhetoric, warning that he might  introduce customs duties on EU import. The pound responded to that  by a drop of 200 pips on Monday. Will further depreciation of the pound sterling continue?

Fundamental analysis

The British Prime Minister said last week that the UK would not adopt EU rules on competition, ecology, subsidies, etc. He also stated that if the EU insisted on them as a condition for concluding a trade agreement with free access to the EU market, he will introduce customs and tarrifs. He also said that he would like to use the EU-Canada treaty for a possible agreement with the EU. However, according to some analysts, this may not be appropriate for relations with Britain as, for example,  it does not address service areas, which  make up 80% of British GDP.

From macroeconomic data, last week, a set of data was reported on Purchasing Managers' Indices (so-called PMI indices) in the manufacturing sector, which reached a value 50 compared to the previous 47.5, in the construction sector, where the index reached 48.4 compared to the last 44.4. The PMI in services  improved from the previous 50 to 53.3, which is the best level since October 2018. As the UK's GDP is 80% of the service, this indicator is very important in anticipating further developments.

Although macroeconomic data were very good and confirmed an improvement in economic activity, it remained in the shadow of Johnson's statement that sent the pound sterling down. From the weekly perspective, positive PMI data had no effect on the movement of the British currency.