The British Pound is back in focus today, after the news that the United Kingdom signed its first post-Brexit trade agreement. Surprisingly it was not the deadlocked deal with the European Union as expected but a free trade agreement with Japan.
"How fitting it is to be in the Land of the Rising Sun to welcome in the dawn of a new era of free trade," the U.K. International Trade Secretary Elizabeth Truss told reporters at a signing ceremony in Tokyo. "It used to be said that an independent U.K. would not be able to strike major trade deals or they would take years to conclude. Today is a landmark moment for Britain. It shows what we can do as an independent trading nation, as we secure modern and bespoke provisions in areas like tech and services that are critical to the future of our country and the reshaping of our economy," Ms Truss remarked at a joint press announcement with Japan's Foreign Minister Toshimitsu Motegi.
She celebrated sealing the deal by giving her Japanese bargaining partner a jar of posh Fortnum and Mason's Stilton. Stilton cheese, as well as English sparkling wine and made-in-Britain pork, lamb and biscuits, as well as coats and shoes, will become cheaper in Japan after the agreement. However, various financial services are reaching up to 28% of the total export volume of the U.K, making Japan the biggest British export earner. The deal is expected to boost British trade with Japan by at least £15 billion annually and generally make it easier for British companies to operate in Japan. The agreement with Tokyo may open the way for the U.K. to also join the Trans-Pacific Partnership (TPP) with its free trade agreement for 11 countries, including Canada, Australia and Vietnam.
Nearly all British exports to Japan will be tariff free, but tariffs on Japanese export of cars to the U.K. will be removed gradually and won’t be eliminated until 2026, which matches the current Japan’s arrangement with the EU. Japan exports about ¥1.5 trillion Yen of goods to Britain each year, mostly including cars and other machinery. As for now, Japan imports nears 1 trillion Yen (about £7.3 billion only) from Britain, according to the Japanese Foreign Ministry data. Before, Japanese business circles repeatedly expressed their concern about the likely impact of Brexit on Japanese automobile plants in British, territory including the Nissan Motors plant in Sunderland which employs several thousand workers, Hitachi and some railroad car producers. Toshimitsu Motegi said the bilateral deal ensures continuity with the earlier European agreement but new areas of cooperation will be added, such as e-commerce and financial services. Japan’s existing free trade agreement with the EU includes Great Britain only until the end of this year, as it exits the EU.
Mr Motegi added that a deal between the U.K. and the EU remains crucial for Japanese business, particularly carmakers, such as Nissan and Toyota, who use parts from across Europe in vehicles they assemble in the UK. "It is of paramount importance that the supply chain between the U.K. and the EU is maintained even after the UK's withdrawal," he added. Meanwhile, the post-Brexit troubled trade talks between the U.K. and EU just restarted on Thursday, as Michel Barnier, the EU main negotiator, said a day before that the deal is “within reach" again. At the same time, most of the British media is sceptical about any positive messages being interpreted. For example, the Guardian warned that negotiators are "tasked with working through weekends in pursuit of a deal in the remaining few weeks".
The consensus view of the market analysts at the moment is that the talks may be long and difficult, but there will finally be a solution that suits both sides. That's probably why GBP/USD has been enjoying an upside momentum since Wednesday when the Cable touched the high area around 1.3175 after a grievous trade below 1.30 in the morning of the same day. However, enthusiasm has faded even before the encouraging news from Japan. GBP/USD declined to 1.3050 before the Tokyo deal was announcement, then it jumped above 1.31 for a short time, and lost these temporary gains over the following several hours. So, it seems that high volatility is normal modus operandi for the British Pound now, so that a continuing defensive operation to hold at least above the 1.30 psychological support zone is critical for any possible further upside trials.
For EUR/GBP, the 0.90 level defence is probably even more important than for the 1.30 level protection for GBP/USD, as the 0.90 support area was constantly attacked from above throughout October. Markets generally believe that the potential success of negotiations with the EU is more necessary for Britain, so the Pound may gain vs the single currency in case of the normal course of the talks. It is still a hot issue for disputes which currency would be more beneficial in the longer-term from today's deal in Tokyo, the British Pound or the Japanese Yen.
Some critics have said the U.K. Gross Domestic Product (GDP) will gain only 0.07% after the deal with Japan, a small fraction of the trade that could be lost with the EU. There are experts who expressed opinions the deal was a missed opportunity. BBC cited Dr Minako Morita-Jaeger, international trade policy consultant and fellow of the U.K. Trade Policy Observatory at the University of Sussex, as saying: "Given that Japanese FDI (foreign direct investment) has been playing an important role in the U.K. economy and retaining its existing investment in post-Brexit is crucial, the U.K. government should have shown a strong commitment to Japanese investment by including a comprehensive investment chapter encompassing investment protection and dispute settlement." She added that Japan is the largest investor abroad in the world, accounting for 14% of the world total FDI.