British pound battered like a perfect storm for sterling assets

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“Article 18 of the Protocol contains what is known as the ‘democratic consent mechanism’. This is a vote of the Northern Ireland Assembly on Articles 5 to 10 of the Protocol – these are the parts of the Protocol under which Northern Ireland applies the Single Market regulations for EU…If the Assembly votes against the motion, Articles 5 to 10 will cease to apply after two years”, Northern Ireland Assembly.

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The pound came under heavy and widespread pressure on Tuesday as global stock and bond markets battered as events in Westminster sparked ill-founded speculation about UK-EU trade relations, sparking a storm perfect for sterling assets in the process.

The pound fell to the bottom of the basket of major currencies on Tuesday with its heaviest losses suffered at the hands of the Indonesian rupiah, South African rand, Indian rupiah and Korean won, but the US dollar and euro are following. up close in that exact order.

The losses were accompanied by declines for equities and bonds, but were also large and widespread enough to indicate domestic influence at work in sterling.

“Provisional evidence that the recent weakening in economic activity is trickling down to a slightly looser labor market could push the Bank of England a bit closer to a 25 basis point interest rate hike on Thursday instead. than 50 basis points,” said Paul Dales, the UK’s chief economist. at Capital Economics.

“But with the Fed seemingly set to announce a 75 basis point hike tonight and the pound having already weakened to $1.22, we are sticking to our forecast of a 50 basis point hike from 1.00% to 1.50%,” he adds.


Above: British pound against its G10 peers on Tuesday. Source: British Pound Live.


The pound’s losses intensified after Tuesday’s North American open, but had been accumulating since the morning hours when figures from the Office for National Statistics (ONS) suggested the labor market could tighten. cool faster than the Bank of England (BoE) and other forecasters had expected.

Unemployment rose from a multi-decade low of 3.7% in March to 3.8% in April, while measures of wage and salary growth from the ONS were lower than what economists had forecast just a day after other data suggested the economy could be slowing faster than many had. anticipated.

The figures followed others released in May which showed UK inflation hit 9% in April, which was a multi-decade high for price growth, but also below expectations for 9.1% of the BoE, which is now in a difficult situation. uncomfortable position ahead of Thursday’s interest rate decision.

“It’s going to be very close,” Dales of Capital Economics said Tuesday.

All recent data from the UK suggests a decline in economic demand and there is a risk that because of this the BoE will feel tempted to raise the Bank Rate by just 0.25% on Thursday, this which would be contrary to market expectations which have most recently tilted towards a larger move of 0.50%.

The above is one of the main reasons why the pound underperformed on Tuesday, although it is relevant that these losses came following the government’s introduction of national legislation to deal with the Northern Ireland Protocol and the risks it poses to stability in the province.


Above: The pound against other G20 counterparts on Tuesday. Source: British Pound Live.


This protocol device was once known as the “Northern Irish backstop” and is widely misreported and misunderstood in the media and financial markets, meaning it could have contributed to the pound’s losses on Tuesday.

“This is a reasonable and practical solution to the problems facing Northern Ireland. It will protect the EU’s single market and ensure that there are no physical borders on the island of Ireland. We are ready to achieve this through talks with the EU. But we can only progress through the negotiations if the EU is willing to change the protocol itself – at the moment it is not. » Foreign Secretary Liz Truss said.

The UK government has decided to make changes to the Northern Ireland protocol under Article 16 after 18 months of fruitless talks with the European Commission and members of the EU bloc.

“Renegotiating the protocol is unrealistic. No viable alternative solution has been found to this delicate and long-negotiated balance. Any renegotiation would only increase legal uncertainty for people and businesses in Northern Ireland. For these reasons, the European Union will not renegotiate the protocol”, said the spokesman for the European Commission.

This all follows an even longer period of political turmoil in Northern Ireland where the self-governing executive collapsed and ‘unionist’ support for the ‘Belfast deal’ dwindled due to questions posed by the protocol on the place of the province within the United Kingdom.


Above: Article 18, Northern Ireland Protocol. Click on the image for a closer inspection.


Cross-community participation is required by the Belfast Agreement for there to be a devolved government in the province – otherwise it’s Westminster government – and that participation is withheld because there never was and there still is no consent “unionist” for much of the protocol.

This democratic consent is a fundamental requirement of the Protocol itself under Article 18, which provides a legal avenue by which much of the Protocol can be repealed and replaced in 2024 and at frequent intervals thereafter if consent is n is not obtained from the Northern Ireland Assembly.

“Article 18 of the Protocol contains what is known as the ‘democratic consent mechanism’. This is a vote of the Northern Ireland Assembly on Articles 5 to 10 of the Protocol – these are the parts of the Protocol under which Northern Ireland applies the Single Market regulations for EU”, says the Northern Ireland Assembly in an explainer.

“If the Assembly votes against the motion, sections 5 to 10 cease to apply after two years. What exactly would happen in this case is uncertain… If the motion is adopted by a majority of MPs, the next vote will take place 4 years later. If the motion is passed by a majority of MPs and enjoys cross-community support, the next vote will take place 8 years later,” the assembly also said.

Consent can never be obtained if the Northern Ireland Assembly is closed and the province is governed from London.

All of this often goes unnoticed in other media and among financial market commentators, calling into question either integrity or competence.

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