FlowBank

GBP Rallying on New Northern Ireland Trade Deal – What Next for Market?

UK & EU Leaders Finally Agree NI Terms

Almost seven years since the UK electorate voted in favour of Brexit in the June 2016 referendum it looks as though the UK and EU have finally agreed on a solution to what has been the biggest Brexit hurdle: the Northern Ireland protocol.

The issue of how to handle goods travelling between Northern Ireland and mainland Britain as well as between Northern Ireland and the Republic of Ireland has been a major headache for both sides. Given the political history of Northern Ireland and the fragility of the peace agreement, there has been a great deal of difficulty in coming up with a solution that suits both the EU and the UK while also appeasing both Republicans and Unionists in Northern Ireland alike.

Unionist not Happy with Current Terms

Under the current terms, goods entering Northern Ireland from mainland Britain are checked are Northern Irish ports and can then be moved into the Republic of Ireland without being checked again. However, the current system has been opposed by Unionists who claim this effectively creates a border between mainland Britain and Northern Ireland. In protest, the DUP abandoned its position in the power sharing government of Northern Ireland, refusing to take its seat until the protocol was replaced. Previously, all attempts and proposals by the British government to alter the NI protocol had been rebuffed by the EU.

New Deal Offers Hope

However, we have potentially reached a huge turning point in the Brexit process with UK and EU leaders agreeing a new trade deal for Northern Ireland. Under the new ‘Windsor Framework’ deal agreed on Monday between UK PM Rishi Sunak and President of the European Commission Ursula von der Leyen, goods entering Northern Ireland from mainland Britain will go via two lanes. The green lane, which is goods to stay in Northern Ireland will not undergo customs checks as they are merely moving within the UK. The red lane is for goods marked to travel into the Republic of Ireland and beyond and these will be checked.

Still Work to Be Done

The new protocol has been hailed as a victory and a diplomatic compromise by both sides aimed at delivering fully on Brexit and maximizing trade between the UK and the EU once again. GBP has rallied firmly as news of the deal broke with markets optimistic that the UK and EU can finally deliver on a sustainable Brexit package in its entirety. However, despite the UK and EU agreeing the ‘Windsor Framework’, this is by no means a done deal and the agreement will be subject to a final vote in parliament. As such the two scenarios traders are looking at are quite clear.

Bullish GBP Scenario

The first scenario sees the Windsor Framework successfully passing through parliament, receiving support from Tories and crucially, the DUP. With the DUP now happy with the new agreement in place, power-sharing in Northern Ireland is restored and both the economic and political outlook for the UK improve significantly. In this scenario, GBP is likely to remain well supported as bullish sentiment grows stronger.

Bearish GBP Scenario

The alternative scenario is that the new framework doesn’t pass through parliament, suffering a revolt among hardliner Tories, and is snubbed by the DUP as not passing its ‘seven tests’ requirement. In this scenario, it means going back to the drawing board and GBP is likely to suffer sharply in the near term with the economic and political landscape in the UK taking on further uncertainty.

Next Steps

No timeframe has been given as yet for the vote. Initial reports regarding support for the deal are also adding to uncertainty with the DUP acknowledging that significant progress has been made though not outright confirming support for the deal. There is also some market chatter regarding a possible Tory revolt against the deal. For now, however, GBP remains well bid as traders appear to be focusing on the more optimistic scenario of the deal going through and a return to more harmonious trade relations with the EU and more political stability in Northern Ireland.

GBPUSD Weekly Technical Chart 

Source: TradingView / FlowBank

 

The rally off the lows in GBPUSD has seen the pair trading firmly higher, moving back above several key levels. Currently, the rally has stalled ahead of the 1.2659 resistance level with the pair falling back on support at 1.2011 for now. While this level holds as support, the outlook remains in favour of further upside with 1.2659 and 1.3171 the next upside levels to note. Should we break current lows, 1.1417 is the next support to note. 

bg_newsletter