EU and UK Reach Breakthrough Deal Ahead of Landmark Post-Brexit Summit

Economic

Summary:

The European Union and the United Kingdom have tentatively agreed on new arrangements covering defence, fisheries, and youth mobility, marking the most substantial reset in relations since Brexit,...

Comprehensive Agreement Signals Strategic Shift in EU-UK Relations

On May 19, just hours before the EU-UK Summit in London, EU officials confirmed that both sides have reached a provisional agreement encompassing key issues such as defence and security cooperation, fisheries access, and youth mobility programs. The breakthrough comes after extended technical negotiations and increasing momentum in recent days, reflecting a mutual desire to stabilize and deepen ties disrupted by Brexit.

The newly drafted "Common Understanding" document has been distributed to all 27 EU member states and is now undergoing formal approval through a written procedure. According to Brussels-based diplomats, early indications suggest that no significant opposition is expected, setting the stage for an official endorsement during the summit.

A Reset Driven by Mutual Strategic and Economic Interests

The agreement is being hailed by EU diplomats as a landmark development, reflecting a shared recognition that the current global context—marked by geopolitical instability, economic competition, and security risks—demands closer transnational cooperation. British Prime Minister Keir Starmer, European Commission President Ursula von der Leyen, and European Council President Antonio Costa are scheduled to formalize the deal later today.

The inclusion of British firms in large-scale EU defence procurement frameworks is expected to be one of the most economically impactful elements of the deal. This represents a significant policy reversal since the UK’s departure from the EU and highlights the continent’s renewed focus on collective defence capabilities amid rising external threats.

For the UK, re-engagement in EU security infrastructure offers both strategic legitimacy and economic opportunity, especially at a time when global military procurement and supply chains are becoming increasingly integrated.

Youth Mobility and Fisheries: Symbols of Reconciliation

Beyond the defence sector, the agreement also addresses two politically sensitive areas: fisheries and youth mobility. Disputes over fishing rights had remained an enduring flashpoint since Brexit, particularly between the UK and EU coastal states. While specific details are not yet public, the inclusion of fisheries in this broader reset suggests a pragmatic compromise has been found to stabilize maritime economic activity.

The youth mobility arrangement, meanwhile, marks a re-opening of opportunities for young people to travel, study, and work across borders more freely. This is expected to restore some of the lost people-to-people exchanges that were abruptly disrupted by Brexit, particularly impacting university partnerships, cultural exchanges, and early-career job markets.

Diplomatic Tone Suggests Renewed Trust

Diplomats involved in the process have described the atmosphere as markedly constructive. “The scene is now all set for a very successful and constructive reset of the relationship,” said one EU official, noting that the agreement reflects “positive signs” from recent days of negotiation in London.

The tone suggests a mutual effort to move beyond past friction and begin a more stable and productive chapter. While the new deal does not reverse Brexit, it reflects a recalibrated relationship built on shared challenges—from economic competitiveness to regional defence coordination.

This tentative agreement marks the most significant re-engagement between the EU and the UK since the 2016 referendum. Rather than reigniting debates over sovereignty or rejoining the bloc, it signals a pragmatic shift towards practical cooperation in critical sectors. As global pressures mount, both sides appear to recognize the costs of isolation and the strategic value of collaboration. If formally adopted by all member states, this agreement could serve as a new foundation for stability, economic partnership, and regional security in post-Brexit Europe.

Source: Reuters

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Glendon

Economic

Forex

Euro-area inflation will fall below the European Central Bank’s target next year because of fallout from US trade policies, according to the European Commission.

Consumer-price growth will slow to the 2% goal by the middle of this year and average only 1.7% in 2026, the EU’s executive arm said in its spring forecast released on Monday. Downward pressures including lower energy costs, the diversion of Chinese goods and a stronger euro are having a “clearly negative” impact, the commission said.

Economic expansion is seen picking up to 1.4% next year from 0.9% in 2025, a slightly more optimistic view compared to the last ECB forecast in March and the International Monetary Fund’s global outlook in April. Brussels officials see uncertainty weighing on domestic demand, but labor markets staying robust.

“Inflation is declining faster than previously forecast and is on track to reach the 2% target this year,” European Economy Commissioner Valdis Dombrovskis said. “But we cannot be complacent. The risks to the outlook remain tilted to the downside, so the EU must take decisive action to boost our competitiveness.”

The ECB will present its own set of quarterly forecasts alongside its next rate decision on June 5. Investors are expecting another reduction in borrowing costs, with many policymakers sharing the view that US tariffs will put downward pressure on prices.

Uncertainty about how policies evolve is high. Most euro-zone exports to America are subject to a 10% tariff during a 90-day negotiation period. The EU is seeking to secure favorable terms in these talks, but it has also prepared a list of products to hit with counter-levies should discussions fail.

The EU’s forecasts assume that US tariffs remain at 10%, with higher duties on some products and exemptions on others, and used a cut-off date of April 30 for other inputs. Some de-escalation between the US and China was expected, but with duties remaining at a higher level than what was announced on May 12.

The two nations agreed to temporarily slash tariffs to allow for talks after previously raising them to prohibitive levels. The tensions have raised the threat that a large amount of Chinese products get rerouted to the euro zone, intensifying competition and driving down prices.

“Given the magnitude of these flows, this is set to markedly increase competitive pressures in consumer goods markets across the EU,” the commission said. Together with the appreciation of the euro, this should push goods inflation down to close to 0% in the euro area, it said.

Services costs have remained more elevated, mostly due to robust wage growth. It’s expected to slow “only gradually” to 2.5% toward the end of 2026.

The situation presents a challenge to the ECB, which has to weigh the disinflationary impacts from tariffs in the short term against the longer-term effect from disrupted supply chains and higher fiscal spending in Europe. Many policymakers are wary of taking interests much lower and into territory where they’d boost economic activity.

When the ECB presents new forecasts next month, it will produce different scenarios to capture various possible trajectories on how US tariff policy will evolve.

Germany, the region’s biggest economy, won’t see any economic growth this year before rebounding to a 1.1% pace in 2026, the forecasts show. Austria is the only country in the EU predicted to suffer a contraction in 2025.

The commission expects the euro zone’s collective debt burden to rise to 91% of gross domestic product next year from 89% in 2024. That doesn’t include some of the higher defense spending made possible by a relaxation of the bloc’s fiscal rules because the national plans weren’t concrete enough.

Source: Bloomberg Europe

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James Whitman

Forex

Technical Analysis

The USD/JPY pair declined for a fifth consecutive day, touching 145.25, as the US dollar faced sustained pressure following Moody’s decision to downgrade the US credit rating.

Key drivers affecting USD/JPY

On Friday, Moody’s cut the US credit rating from Aaa to Aa1, citing a deteriorating fiscal outlook and a lack of “effective measures” to curb the widening budget deficit.

Meanwhile, domestic data revealed that Japan’s economy contracted in Q1 2025, shrinking by 0.2% month-on-month and 0.7% year-on-year, falling short of expectations in both cases. This marks the first economic contraction of the year, driven primarily by a decline in exports.

Investors are now closely monitoring Japan’s trade figures, particularly as the potential impact of new US tariffs looms.

In a recent statement, Prime Minister Shigeru Ishiba stressed that Japan would not accept an unconditional preliminary trade deal, especially concerning automobiles. The country remains wary of a potential 25% US tariff on Japanese car imports. While Japanese diplomats are keen to finalise a trade agreement with the US swiftly, they acknowledge that the outcome is not entirely within their control.

Technical analysis: USD/JPY

On the H4 chart, USD/JPY has corrected to 146.04, with the fifth wave of decline now in motion. The immediate downside target is 143.50, with further downward momentum expected today. Once this target is achieved, a potential rebound towards 146.04 may follow. This scenario is supported by the MACD indicator, where the signal line remains below zero and points firmly downward.

On the H1 chart, the pair consolidated around 146.04 before breaking downward. The current focus is on completing the fifth decline wave towards 143.50. So far, the pair has reached 144.80, followed by a minor correction to 145.30. The next expected move is a further drop to 144.15, with an eventual extension towards 143.50. This outlook is reinforced by the Stochastic oscillator, where the signal line has dipped below 80 and is trending sharply downward towards 20.

Conclusion

The US dollar’s weakness, exacerbated by Moody’s downgrade, continues to drive USD/JPY lower, while Japan’s economic contraction adds further complexity. Traders should monitor trade developments and technical levels for near-term direction.

Source: ACTIONFOREX

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James Whitman

Economic

Thailand and Indonesia pledged to boost trade and investment and cooperate on cyber scam and drug trafficking crackdowns, as Southeast Asia’s two biggest economies elevated ties to a strategic partnership.

Thailand will host the two countries’ first joint trade committee meeting later this year to explore ways to strengthen economic cooperation, Prime Minister Paetongtarn Shinawatra said during a joint news conference in Bangkok on Monday alongside Indonesian President Prabowo Subianto.

Both countries will explore possible deals through their respective investment institutions, including Indonesia’s newly established wealth fund Danantara, Prabowo said. Indonesia will also open up opportunities for Thai companies to invest in its energy sector and potentially form joint ventures in food management and storage, he said.

Thailand and Indonesia, which have a total trade worth $18 billion, will work to strengthen the 10-member Association of Southeast Asian Nations and push for more economic integration within the bloc to unite against the backdrop of global geopolitical and economic uncertainties, the Thai leader said. The two countries will also work with Malaysia, which is this year’s Asean chair, to bring peace to civil war-torn Myanmar.

Paetongtarn and Prabowo, who was in Bangkok for his first official visit, also said the two countries will cooperate on the defense industry and military exercises, and increase maritime and law enforcement collaboration.

The two leaders welcomed new flight routes connecting more Thai and Indonesian cities, including Bangkok-Surabaya and Bangkok-Medan. They also pledged to exchange official visits more frequently in the future.

Source: Bloomberg Europe

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Gerik

Economic

Rate Cuts Set the Stage for Property Revival

The Reserve Bank of Australia (RBA) is widely expected to reduce the cash rate to 3.85% on May 20, with market projections anticipating two additional cuts by December—potentially pushing rates down to 3.35%—and a further reduction in mid-2026. This easing cycle marks a significant policy shift, and, historically, falling interest rates have been closely followed by housing price surges.

Peter Munckton, Chief Economist at Bank of Queensland, points to four decades of data suggesting that home prices could increase between 10% and 15% over the next two years. Although he downplays the likelihood of gains exceeding 20%—as seen in the 1980s, early 2000s, and the COVID-era boom—he still sees a strong probability of solid market growth given the low unemployment rate and a supportive monetary policy environment.

The unique confluence of factors that drove previous surges—such as financial liberalization, high income growth, pandemic stimulus, and work-from-home trends—may not be present today, but the current downward interest rate trajectory still forms a powerful driver for demand.

Supply Constraints Exacerbate Price Pressures

Structural shortages in housing supply are reinforcing the upward trend in property prices. Dr. Peter Tulip, former RBA economist and current housing policy researcher at the Centre for Independent Studies, warns that the forces lifting prices—such as declining rates, rising rents, and persistently low vacancy rates—are far stronger than any opposing pressure.

Official figures from the Australian Bureau of Statistics (ABS) show that only 180,000 housing units were approved in the 12 months leading to March 2025. While this figure represents a slight recovery from the mid-2024 trough of 164,000 units, it remains well below the 2016 peak of 243,000 approvals per year.

This underwhelming supply trajectory poses a serious challenge to the Albanese government's goal of building 1.2 million new homes by 2029. Without a substantial boost in construction activity, analysts warn that the widening gap between demand and supply will accelerate price increases, particularly in high-growth urban corridors.

First-Home Buyer Stimulus Likely to Intensify Market Demand

In a pre-election move that follows Australia’s long-standing tradition of demand-side housing intervention, Prime Minister Anthony Albanese unveiled a sweeping expansion of the government’s First Home Guarantee Scheme. The program now allows first-home buyers to enter the market with only a 5% deposit, with government backing removing the need for costly lenders’ mortgage insurance.

The income cap of AUD 125,000 has been scrapped, and the cap of 35,000 participants per year has been lifted entirely. Property price ceilings eligible for support have also been raised, making more properties accessible under the scheme.

While the government has pledged to construct 100,000 new homes, experts note that such a supply response will take years to materialize. In contrast, the impact of expanded first-home buyer support is expected to be immediate. Tulip believes the most significant effects will be seen in suburban and peri-urban areas, where first-home buyers are concentrated. He anticipates moderate price increases in these zones.

However, other economists suggest the impact may be broader and more intense. They argue that by encouraging buyers to borrow at higher loan-to-income ratios, the scheme may inflate house prices well beyond sustainable levels, particularly in a low-rate environment. In the fiscal year 2023–2024, nearly one-third of all first-home buyers used the scheme—even when participation was still capped—suggesting demand under the new expansion could surge even further.

Australia’s property market is poised for a strong upward trajectory through 2025 and into 2026. The combination of rate cuts, tight supply, and aggressive first-home buyer support is creating a demand-heavy environment with limited room for supply response. Although the pace of growth may not reach historic highs, all key indicators—ranging from construction approvals to rental pressures—point toward renewed heat in the market. The main uncertainty now lies in whether policymakers can temper the housing surge without undermining access or triggering financial overextension among new borrowers.

Source: Reuters

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Gerik

Economic

A Bold Yet Delayed Commitment

In early May, the European Commission unveiled a long-awaited roadmap aimed at completely phasing out Russian fossil fuels from the continent’s energy mix by 2027. The plan sets a two-stage process: a ban on new contracts with Russian gas suppliers by the end of 2025, followed by the termination of all remaining imports by 2027. This move seeks to translate earlier political declarations into legally binding action.

European Energy Commissioner Dan Jorgensen emphasized the ambition to eliminate Russian gas entirely, responding to both public criticism and ongoing pressure following Russia’s invasion of Ukraine. However, expert assessments suggest that the practical implementation of this roadmap remains deeply uncertain.

Import Paradox: Russian LNG Still on the Rise

Despite rhetorical commitments to energy independence, EU imports of Russian liquefied natural gas (LNG) and pipeline gas rose by 18% in 2024, according to Eurostat. The EU spent €23 billion on Russian fossil fuels last year, undermining the credibility of its energy disengagement goals.

Countries such as France, Belgium, and Spain continue to act as key entry points for Russian LNG. France alone increased its Russian LNG imports by 81% in 2024, benefiting from advanced LNG infrastructure. According to the IEEFA, once LNG enters the EU grid, it becomes nearly impossible to trace its origin—creating opportunities for “rebranding” Russian gas as European energy. This loophole severely complicates enforcement of the REPowerEU strategy announced in 2022.

Internal Divisions Undermine Collective Resolve

A core obstacle to the roadmap’s success lies within the EU itself. Although the proposal only requires a simple majority vote, the political resistance is clear. Member states like Hungary, Austria, and Slovakia—still reliant on Russian pipeline gas—have opposed similar restrictions in the past.

Even within more aligned states, energy policy remains inconsistent. While the EU has banned transshipment of Russian LNG to third countries, direct imports for domestic use remain untouched. As a result, national strategies diverge significantly, diluting the bloc’s negotiating power and undermining collective goals.

Moreover, some EU nations prioritize economic pragmatism over political alignment. The reliance on cheap Russian gas has historically underpinned the industrial competitiveness of countries like Germany and Italy. With gas prices in Europe rising 59% in 2024 alone—despite easing during the post-winter season—many industries face steep energy costs compared to competitors in the U.S. and China.

New Dependencies and Questionable Alternatives

While the EU has diversified supply, including increased LNG imports from the United States, this shift raises new concerns. Researcher Pawel Czyzak argues that the EU is merely exchanging one geopolitical dependency for another. The dominance of U.S. LNG in Europe gives Washington considerable leverage, especially under the unpredictable administration of President Donald Trump, who has previously used trade policy as a coercive tool.

This creates an uncomfortable paradox: while the EU aims to free itself from Russian influence, it risks becoming more vulnerable to external price manipulation and political interference from other suppliers.

Reducing Consumption: A Necessary but Difficult Pillar

Experts agree that reducing overall gas consumption, rather than simply shifting suppliers, is critical. Ana Maria Jaller-Makarewicz from IEEFA highlights energy efficiency as a strategic path forward. She suggests greater investments in household insulation and rooftop solar installations to cut heating demand.

However, implementing large-scale energy-saving measures faces financial and political obstacles. Public funding for energy retrofitting is limited, and coordination between national governments remains uneven. More importantly, political will varies drastically across the bloc, especially in member states where fossil fuel use is deeply embedded in local economies.

Diplomatic Variables and Geopolitical Risks

Complicating the picture further, ongoing international negotiations related to the Russia-Ukraine conflict may intersect with EU energy policy. Should diplomatic talks—brokered by the United States—result in sanctions relief for Russia, the EU’s roadmap could lose momentum. Any perceived softening of penalties would risk undermining current policy efforts, especially if energy prices remain high.

This geopolitical backdrop reinforces the argument that unity within the EU is more vital than ever. Without coordinated support across member states, efforts to reduce energy reliance on Russia may collapse under the weight of national interests and external pressures.

The European Commission’s roadmap to eliminate Russian energy dependence by 2027 is a politically bold but operationally fragile vision. While the timeline offers symbolic clarity, structural constraints—ranging from surging Russian LNG imports to internal EU divisions and the emergence of new supplier dependencies—raise critical doubts about feasibility. Unless the EU can simultaneously reduce gas consumption, enforce traceability, and foster unity among its members, energy autonomy from Russia may remain an aspirational target rather than a strategic reality.

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Gerik

Economic

Commodity

Demand Weakens in OECD Economies While Emerging Markets Adjust Upward

According to its latest report, the IEA maintains a cautious outlook for oil demand growth, projecting an increase of 740,000 barrels per day (bpd) in 2025 and a slight uptick to 760,000 bpd in 2026. Yet, these headline figures conceal a sharp divide between developed and developing economies.

In the OECD bloc, demand is expected to fall by 120,000 bpd in 2025, deepening to a decline of 240,000 bpd in 2026. This trend reflects a combination of economic stagnation and persistent trade uncertainties, especially as global markets react to prolonged tensions and a fragile U.S.-China trade detente. Even with lower oil prices and a softer U.S. dollar, the stimulative effect on consumption in these advanced economies appears marginal, as energy pricing controls and subdued industrial output continue to cap demand growth.

By contrast, updated national statistics have prompted the IEA to revise demand forecasts upward for countries such as Egypt and Nigeria. Egypt’s oil consumption, particularly in diesel, fuel oil, and liquefied petroleum gas (LPG), has risen due to gas shortages that have forced a shift toward oil-fired power generation. In Nigeria, higher demand for gasoline and diesel is tied to the operational ramp-up of new refining capacity, especially the Dangote Refinery mega-project, which is boosting local fuel supply and internal demand.

OPEC+ Drives Supply Growth, but Non-OPEC Output Faces Constraints

On the supply side, OPEC+ is projected to raise its output by 1.6 million bpd starting in 2025. Saudi Arabia is expected to be the primary contributor, leveraging its spare capacity to offset weaker contributions from other alliance members struggling to meet quota targets.

Outside the OPEC+ bloc, the picture is more mixed. While non-OPEC+ supply is estimated to grow by 1.3 million bpd in 2025, that momentum may not hold into 2026, when growth is forecast to slow to 820,000 bpd. The primary reason is the mounting financial and technical pressures on the U.S. shale sector, which is grappling with capital constraints and rising production costs, limiting its capacity to scale up despite market incentives.

Russia Under Pressure From Low Prices and Sanctions

Russia, meanwhile, is enduring a dual blow from falling oil prices and tightening Western sanctions. Despite exporting 7.6 million bpd in April—one of the highest volumes in recent months—its oil revenue plummeted to $13.2 billion, the lowest since mid-2023. New sanctions targeting the country’s tanker fleet, combined with partial relaxation of price caps, are further complicating export logistics and revenue collection.

Given the centrality of oil to Russia’s federal budget, these pressures represent a significant fiscal risk. Moscow’s efforts to maintain production and revenue have become increasingly difficult as market access tightens and geopolitical restrictions persist.

OPEC Adjusts Supply Projections, Highlights Long-Term Risks

OPEC’s own monthly outlook introduces a more conservative stance than the IEA, forecasting non-OPEC+ supply growth of only 800,000 bpd annually in both 2025 and 2026. This downward revision reflects expectations of a 5% reduction in upstream investment outside the alliance, as companies weigh capital discipline against uncertain long-term oil demand trajectories.

Additionally, OPEC has raised its projection for the volume of crude needed to balance the global market, now pegged at 42.6 million bpd in 2025 and 42.9 million bpd in 2026. These adjustments underscore the group’s recognition that even modest demand growth—when matched with disciplined supply—can support a more stable pricing environment if geopolitical shocks are avoided.

Market Outlook Remains Fragile as Risks Accumulate

Despite signs of a supply-demand rebalancing, the IEA and OPEC both acknowledge that the global oil market is entering a highly sensitive phase. Trade policy volatility, including tariff escalations and retaliations, remains a significant disruptor. Moreover, investment hesitancy in exploration and production—particularly in high-cost regions—signals deeper structural risks for future output.

Geopolitical tensions and logistical bottlenecks, particularly in regions like the Middle East and Eastern Europe, continue to inject instability into both production and transport chains. These layered uncertainties complicate the outlook, and analysts remain cautious in predicting oil price trajectories or inventory behavior beyond the next 18 months.

In summary, while a build-up in global oil inventories is expected from 2025 due to weakening demand in advanced economies and increased supply from OPEC+, the fragile equilibrium depends heavily on how nations navigate economic recovery, energy policy, and geopolitical risk in a turbulent international environment.

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