UK/ US trade pact: what we know so far

The big news today is not the BOE meeting or the fallout from last night’s FOMC meeting, but instead it is the UK/ US trade agreement. Details are starting to leak as we lead up to a press conference in the White House at 1500 BST.

Below, we look at the details so far:

·         President Trump has said that this will be a  ‘full’ trade pact, which is the first deal to be announced since the reciprocal tariffs in April.

·         This will not be a full-scale free trade deal, instead it could be limited in scope.

·         Media is reporting that the 10% baseline reciprocal tariff rate will be left in place.

·         Although the deal is expected to be narrow in scope, it could include a decline in the 25% tariff rates for UK auto and steel exports to the US.

·         Pharmaceuticals, semiconductors, and aerospace could also be included in the new deal.

·         It is unclear if UK film exports to the US will see a reduction in the 100% tariff rate that was announced at the weekend. Due to the large film production industry in the UK, the government will no doubt have worked hard to try and bring this rate down.

·         The focus will be on what concessions the UK has given to the US in return for a decline in tariffs. The government has been clear that it was unwilling to drop animal welfare and food standards during the negotiations, although we expect agricultural imports from the US to the UK to be included in the deal, along with lower tariff rates on US cars coming to the UK. If food standards are dropped to get a deal, expect a backlash against the government.

Today’s announcement could be just the start, with hopes for a UK/ US tech partnership in the future.

A symbolic moment in US trade relations

This deal is symbolic since it is the first to be announced since the reciprocal tariffs were delayed last month. However, we do not think that the UK deal is a blueprint for elsewhere. The UK deal has taken weeks of intense negotiations, and the UK has a better diplomatic relationship with the US compared to others like China and the EU. Added to this, trade between the UK and the US is roughly equal, and the UK does not run huge deficits with the US unlike the EU and China. Thus, it is hard to know what this deal means for global trade relations.

The market reaction so far

The market has reacted positively to the UK news. Stocks are higher in Europe and US equity market futures are also pointing to a higher open later this afternoon. However, European stocks have pulled back from their highs after the news that the UK/ US trade deal would include the 10% baseline for reciprocal tariffs. The FTSE 100 is underperforming, as it is more exposed to global trade. However, the FTSE 250 is benefitting from this trade deal news,  although it has also backed away from the daily highs. This suggests that the markets may be a little disappointed that the scope of this deal is narrow, but it also suggests that, as yet, the market has not been spooked by the 10% tariff rate that is set to remain in place.

Pound receives a boost

The pound is the best performer in the G10 FX space so far on Thursday and GBP/USD is back above $1.33 after dipping below this level after the BOE meeting. EUR/GBP is down 0.3%, as the UK’s trade deal brings into focus the fact that the EU still does not have a deal with the US, and that it will be harder to achieve one.

There will be plenty of scrutiny of the deal to see if the UK has secured good terms with the US. If the deal is generous then it could offer hope that the US is in a negotiating mood as the US will meet China this weekend to discuss trade. This could lift overall market sentiment. If the deal is seen as a dud and too limited to be of any economic benefit, then we expect risk sentiment to sell off.

What next for gold and the dollar

The gold price is worth noting. After falling at the open on Thursday, it is rising as we lead up to this statement. This is a sign that the market remains nervous about US trade tariffs. If negotiations don’t lead to a solid reversal of tariff rates, then global growth could still be impacted, which is being reflected in the gold price on Thursday. The UK deal is seen as a litmus test for markets that are sensitive to global trade relations.  

We would also note that Bitcoin is marching back towards $100,000, as it maintains its positive relationship with gold. As Bitcoin and the gold price rise, the dollar remains weak, which is a sign  that the market is not seeing the UK/US trade deal as the end of concerns about US tariffs. A bit like the Fed, the market is taking a cautious stance on Thursday. 

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