GBP/USD remains at two-week lows, unreactive as UK/France fishing tensions show signs of easing

• GBP was the worst performing G10 currency on Monday, with GBP/USD remains subdued around 1.3650-1.3700.
• News that France has postponed a deadline for an agreement with the UK over fishing rights hasn’t moved markets.
• While cross-channel tensions are one key theme this week, whether the BoE hikes rates or not is another.

GBP is the worst performing G10 currency on Monday, down about 0.2% versus the US dollar, but down about 0.6% versus the euro. That has meant that GBP/USD has traded subdued between 1.3650-1.3700 for the majority of the day, its lowest in about two and a half weeks. Tensions with France over fishing have escalated in recent days and are widely being attributed as behind Monday’s underperformance.

But the latest news on this front has been positive; according to Reuters, on Monday evening at the sidelines of the COP26 summit, French President Emmanuel Macron announced that his government would be postponed by one day the deadline for a resolution of the ongoing fishing row with the UK. Previously the French government had said that it would be implementing stricter checks on trucks coming into the EU from Britain and would be banning British trawlers from docking at French ports from 2300GMT on Monday. France claims that the UK has not fulfilled its pledges in the Brexit deal in terms of giving fair access to French fishing boats in UK waters. Talks between the UK and France were ongoing on Monday and Macron said that such talks must continue. “We'll see where we are tomorrow at the end of the day,” said Macron.

UK PM Boris Johnson’s rhetoric/tone to the press on the escalating spat over fishing access with France was fairly measured, with the PM merely pledging that the UK will take proportional action. The UK PM and French President will have spent a great deal of time in the presence of each other on Monday and over the last few days, given both of their presence at the G20 (which has now ended) and the start of COP26 (which ends in two weeks) and this finally appears to have resulted in an easing of tensions. But one day is not long for the two sides to reach an agreement, so the risk of the spat escalating in an actual trade/legal battle remains high and is a key story for GBP traders to watch this week. If France is to follow through with its threats against the UK, this arguably does pose an (albeit small) downside risk to the UK economy by further exacerbating the supply chain disruptions/bottlenecks currently hampering growth.

Another key theme to watch this week is Thursday’s Bank of England meeting; economists and money markets are split on whether or not the bank is going to go ahead with a 15bps rate hike. There are four hawkish Monetary Policy Committee (the committee of nine who vote on interest rates, sometimes referred to as the MPC) members who likely favour a hike, including Governor Andrew Bailey, Chief Economist Huw Pill, Deputy Governor Dave Ramsden, and External MPC member Michael Saunders. These members have expressed worries about inflation expectations becoming deanchored amid the recent surge in CPI to multi-year highs and amid expectations this surge is going to worsen next year. Meanwhile, there are three MPC members, including external members Catherine Mann, Jonathon Haskell and Silvana Tenreyro who would rather wait until at least December to observe how the labour market develops in wake of the end of the government’s furlough scheme in September (much of the labour market data for October won’t be out until December). Deputy Governors Jon Cunliffe and Ben Broadbent have not given indicated which camp they fall in yet, and their votes will ultimately swing whether or not there is a hike or not.