Monday saw the UK seal its third major trade agreement in a fortnight, this time tightening its relationship with the EU. The news saw the pound rise nearly 0.5% against the dollar and level growth with the euro, suggesting markets approve of the news.
While the trade agreement only represents 0.3% growth in GDP over the next 15 years, the UK government is calling it a “reset” of relations. Much of the language in the deal signed on Monday leaves the door open to future deals on trade and defence collaboration. Though, thornier subjects, such as a youth mobility scheme were also kicked into the long grass.
The deal, while small in the grand scheme of things, follows hot on the heels of deals with the US and India, and last week’s surprising 0.7% boost in GDP. This activity is driving gains against the dollar, with the pound climbing 1.36% in the past week and 0.5% yesterday alone.
However, tomorrow’s inflation data may bring the UK back down to earth. It’s currently forecast to leap from 2.6% to 3.3%, largely driven by US President Donald Trump’s tariff chaos.
The dollar may also have struggled on Monday because the markets were reacting to the US’s downgraded credit rating. Citing US debt and interest payments, Moody’s stripped the government of its AAA rating, lowering it to AA1.
The downgrade has further increased the cost of US debt, right as the Trump is trying to push through a budget filled with tax cuts that analysts say will worsen public finances.
The same factors that benefitted the UK seem to have helped the euro, seeing it remain level with the pound throughout Monday and gain similar ground against the dollar. Although, as a sign of what may be to come for the UK on Wednesday, inflation numbers in the EU revealed a rise to 2.7% from 2.3%.
The impact of Trump’s tariffs is still trickling in through this month’s data releases, and Thursday will show how Germany’s manufacturing industry believes it will fare in the coming year. With the tariffs now reset, it is currently forecast to be positive news.
