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Major news outlets are reporting that the United Kingdom and European Union have come to a post-Brexit trade agreement, avoiding a cliff-edge economic transition after the country leaves the single market on January 1.

The divorce arrangement, reached after four and a half years of political turbulence, provides for the tariff- and quota-free movement of goods across the Channel, avoids the creation of a hard border in Ireland, and puts the foundation in place for a post-transition security architecture.

British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen personally intervened in the final round of negotiations, helping resuscitate a deal that had foundered on economically insignificant, but politically crucial fishing rights. The final text reportedly maintains European access to UK waters for five and a half years, while progressively limiting quotas so that Britain’s share of the catch increases over time.

Sunlit uplands might seem to beckon, but the volume of paperwork involved in trade is poised to soar after January 1, and the number of border checks will increase drastically from current levels. British citizens will lose the ability to move freely across the Continent, and restrictions will be placed upon expatriate workers. A new arbitration mechanism – designed to create a “level playing field” – is likely to see heavy use in the years ahead as the UK attempts to pull away from an ever-growing thicket of EU regulations.

The services sector, critical to the British economy, falls largely outside the agreement’s scope.

EU member states – represented by envoys in Brussels – must now approve the deal on a provisional basis. Given the need to translate and assess the agreement in 27 different countries, the review process is expected to take up to a week, allowing implementation to begin before the end of December. If provisional approval is granted, full ratification by the UK and European Parliaments will begin later in January.

The pound surged more than 1.7% against the dollar as optimism built through the trading cycle. Implied volatility is down, and hedging costs are trending lower.

Relief on global markets is also palpable, with the news helping to remove a major source of uncertainty clouding the economic outlook – but that’s nothing in comparison with the comfort felt by foreign exchange analysts as they look forward to a time in which the word “Brexit” is (largely) resigned to the history books

Karl Schamotta
Chief Market Strategist