Brexit themes are coming in at the start of the week to put GBP at the top of the fundamental watchlist in the open. The British government is preparing to trigger Article 16 of the Northern Ireland Protocol. Minister for Foreign Affairs Simon Coveney has warned that doing so could lead to a trade dispute between the European Union and the UK.
Most economists would agree that this will damage both sides, but the Uk is more vulnerable to the negative ramifications which likey will be a weight on the pound, especially following the Bank of England’s surprise hold at last week’s meeting.
The minister said that Ireland needs to prepare contingency plans and will not be surprised now if this happens after the COP26 summit.
Mr Coveney said “this would be a significant act that would damage relationships between Britain and Ireland and put extraordinary pressure on parties in Northern Ireland”. Mr Coveney told This Week that “whether that is part of an ongoing negotiating strategy to try to change, amend or end the Protocol is hard to know, but certainly the signals are not good”.
Following talks between the pair in Brussels on Friday, the UK government said that “progress had been limited” but that “gaps could still be bridged through further intensive discussions”.
Prior to Friday’s meeting with Mr Sefcovic, Lord Frost said: “We’re not going to trigger Article 16 today, but Article 16 is very much on the table and has been since July.”
GBP/USD has so far steadied in the low 1.34 area but momentum is with the bears and there is a risk of a break of the lat September lows of 1.3411 for the sessions ahead should this risk gather traction.
However, given that we are yet to see a correction, the 1.35 area is not out of the question either: