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Following the successful negotiation of a Brexit deal in late December, the UK and EU are now operating under the terms of this new trading arrangement. The UK-EU trading deal is bare-bones in substance with potential flashpoints over the next few years. The deal is likely to be augmented over time, with financial services and data the focus for 2021 while reviews and disputes could still lead to the deal collapsing at some point further down the line, according to economists at Standard Chartered. Modest divergence is likely over the medium-term, but possible re-convergence over the long-term.

The GBP/USD pair remains depressed around mid-1.3500s.

See – GBP/USD Price Forecast 2021: Cable braces for calendar comeback amid three exits

Key quotes

“As for what comes next, both sides will wish to add to the existing terms outlined in the deal, given how little time there was to explore all areas of cooperation last year; financial services and data sharing are likely to receive significant focus over the coming months. However, without any impending deadlines, and given the divergent interests – particularly around financial services – rapid progress is unlikely.” 

“The deal is inherently unstable given the multitude of review points over the coming years that could lead to the activation of formal dispute mechanisms.” 

“The current UK administration is unlikely to utilise to their full extent many of the new-found freedoms on offer under the terms of the new Brexit deal, but there will likely be some areas where divergence is sought. These will test the limits of the governance mechanisms enshrined in the legal text of the deal. We, therefore, cannot rule out the deal coming under severe stress or even collapsing further down the line, although this is not our base case.”

“Over the longer-term, once the dust has settled and assuming continued lobbying by UK businesses for closer economic and regulatory cooperation with the EU, it seems likely that future UK governments will begin a process of re-convergence, at least for some sectors and in certain policy areas.”