06:46 AM EDT, 05/20/2025 (MT Newswires) -- The less favorable risk conditions in financial markets on Monday in response to increased concerns over the fiscal outlook in the United States and continued concerns over possible diminishing confidence in U.S. assets saw the euro (EUR) outperform sterling (GBP) although the outperformance faded as the day unfolded with equities in the U.S. rallying from the lows at the start of the U.S. trading day, said MUFG.

What was clear was that the announced European Union-United Kingdom deal didn't have much market impact, with the details having little impact in shaping investor expectations on the outlook for either economy, wrote the bank in a note to clients. While economically the financial markets haven't responded to the deal, politically this could still mark an important turning point after years of acrimony.

European Commission President Ursula von der Leyen stated that it marked a "new chapter" in EU-U.K. relations.

However, the most contentious politically for Prime Minister Keir Starmer in Britain will be granting access to EU fishing in U.K. waters for an additional 12 years. ONS data indicated that in 2023, the gross value added of the fishing industry was just 862 million pounds, representing 5.7% of the total value added of the agricultural sector. Fishing alone amounted to 0.03% of economic output.

PM Starmer has argued that the easing of veterinary rules will boost U.K. exports of food and drink to the EU and would, as such, easily offset the negative impact on fishing.

While that looks like a valid argument, it won't stop the populist Reform party taking advantage of this and will only reinforce Reform support in rural coastal regions across the U.K., stated MUFG. PM Starmer has tried to offset this risk related to fishing by promising 360 million pounds of investment for fishing and tourism in coastal areas.

A recent YouGov poll published last Friday revealed that 22% of respondents now expect Nigel Farage to be the next PM versus 14% who stated PM Starmer. The next election in the U.K. isn't until 2029 and, as such, the near-term political risks from this announcement are negligible, but policies to boost economic growth will be crucial to curtail the risk of Reform being the largest party in a new coalition government.

In the near term, sterling's direction will be dictated by the incoming data, which won't be influenced by this EU-U.K. deal, added the bank.

The consumer price data for April, to be released on Wednesday, is likely to see a notable jump from 2.6% in March to an expected 3.3%, noted MUFG. The national insurance contributions (NIC) tax increase went live in April and energy prices jumped and other utility bills and tax increases also went into effect.

The NICs' impact is more difficult to predict and any upside inflation surprise on Wednesday will likely be due to companies passing on more of the cost of the tax, according to the bank. The Institute for Fiscal Studies estimated that the cost for an employee on a median salary will increase by 7.1% due to the NICs.

That could result in a larger impact and a more widespread increase in inflation.

A consensus 3.3% CPI year-over-year gain will likely be met with relief. That's the estimate of what the Bank of England expects as well and would help the BoE deliver the two rate cuts currently priced, according to MUFG.

An upside surprise would likely give GBP a boost, although a negative growth implication would likely mean the impact would fade quickly, pointed out the bank.