GBP/USD: Pound slumps on UK idea for Canada-style FTA with EU

The British pound is lower against the US dollar on Monday afternoon over concerns the UK Government led by Prime Minister Boris Johnson would embark on a Free Trade Deal with the EU which would involve diverging rules and high trade barriers.

GBP/USD was lower by 142 pips (-1.07%) at 1.3059 with a daily price range of 1.305 to 1.319 as of 1.30pm GMT. The currency pair nosedived from a 1-month high, leaving it in the middle of its 5-day trading range.

Pound Sterling

In a speech on Monday, Prime Minister Boris Johnson aimed to further clarify his government’s position about what he calls a “Canada-style FTA”. In response to questions about so-called ‘alignment’ he said, “The UK will maintain the highest standards without the need for a treaty.” “We’ve made a choice; we want a comprehensive free trade agreement like Canada’s.”

While of course there are still many details to be ironed out, Canada’s trade deal with the EU only pertains to good and does not consider services, which is the UK’s main export. Businesses in areas like financial services, the UK’s biggest sector by GDP contribution could be heavily impacted if no formal agreements are made with the EU.

The potential for divergence, adds to the uncertainty already felt by markets regarding the difficulty of striking a free trade agreement (FTA) with the EU in 11 months.

Sterling rose 0.95% against the greenback last week for second weekly gain as traders pared back expectations the Bank of England would cut interest rates. Speculation about what would happen to monetary policy in the UK had distracted market participants from thinking about the future trading relationship between the EU and UK.

The US dollar

The US dollar was benefiting from another daily slide in the Chinese yuan where the onshore rate fell below the key 7.00 handle watched by markets. Chinese markets opened for the first time since the Lunar New Year break to heavy selling, with the Shanghai Composite stock index closing down nearly 8%.

Later today, the US will release manufacturing survey data from January that it is hoped will signal more progress towards the end of a multi-month contraction.

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