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GBP/USD has slipped below 1.40 due to a rapid increase in COVID-19 cases in Britain. The Delta variant is wreaking havoc but recovery is still sound. What’s more, UK/EU tensions over N. Ireland are likely to weigh on GBP into next week’s BoE meeting, economists at Westpac report.

Reopening delays may dampen robust recovery

“UK’s attempts to renegotiate the N. Ireland Protocol in order to avoid potential civil unrest (Unionist marching season peaks on 12th July) stoked EU frustration that UK is failing to implement the existing agreement (EU has insisted that UK’s unilateral ‘grace period’ on traded goods ends on 30th June). The standoff shows the potential fragility of the deal struck with EU and potentially of the United Kingdom itself.”  

“This week’s UK/AU trade deal is the first fully independent (of EU) trade deal that the UK has struck since Brexit. The UK hopes to build on this as well as differentiate its post Brexit financial system. Both aspects may inflame rather than placate EU tensions. Survey data into next week’s BoE MPC should show further recovery potential but the delay in relaxing all covid restrictions may dampen near-term prospects.”  

“Near-term tensions may pressure GBP/USD towards support around 1.38, but it is still seen as a potential base area for an eventual range flip to the upside.”