The pound tumbled on Monday after deadlocked post-Brexit trade talks disappointed investors who had been hoping for progress towards a UK-EU deal over the weekend.
The negotiations over the future trading relationship were on a “knife-edge”, the Irish prime minister said on Sunday — putting the chance of an eventual agreement at 50 per cent. The EU’s chief negotiator, Michel Barnier, warned the bloc’s national ambassadors and parliamentary members on Monday that he could not “guarantee” that there would be a deal.
Sterling fell as much as 1.6 per cent against the US dollar to touch a two-week low just above $1.32, before picking up later in the day, leaving it 0.6 per cent lower at $1.3354 by late afternoon in London. Against the euro, the pound was down 0.8 per cent at €1.1002, having earlier fallen as much as 1.3 per cent.
“What we’ve had today is a dress rehearsal for a no-deal outcome,” said Trevor Greetham, head of multi-asset at Royal London Asset Management. “It reminds me of 2016 and the referendum, when the polls were close but the consensus was that it wasn’t going to happen.”
The UK currency had strengthened in the run-up to the weekend’s tense discussions, reflecting a weaker dollar along with traders’ belief that a deal would eventually be struck.
However, the impasse over the rules that would govern future competition between the UK and the EU — the so-called level playing field — as well as disputes over fishing rights had shaken that confidence, said strategists.
“Clearly, the market was complacent,” said Peter Kinsella head of FX strategy at Swiss asset manager Union Bancaire Privée. “Now, people are going to be trading on every headline for the next couple of days.” Sterling’s strength against the dollar over the past week had masked growing anxiety beneath the surface, with the price of options that protected investors against big swings in the currency climbing steadily, Mr Kinsella added.
Enduring hopes for a deal meant there was room for sterling to fall if eleventh-hour negotiations appeared to be going badly, which is “what we’re starting to see play out today”, said Mimi Rushton, co-head of global FX distribution at Barclays.
A reversion to World Trade Organization terms would be “problematic”, and was not priced in by the market, Ms Rushton added. The pound “certainly doesn’t hold the same safe-haven status that it was once afforded”, she said.
John Madziyire, a portfolio manager at Vanguard, said he was unsurprised by the falls in sterling because the market had recently “moved to be more optimistic”.
“Right now, I think most analysts actually expect a deal,” he said. “The market is not willing yet to price in a no-deal,” and would be hesitant to do so until there was definitive news of one, he added.
This could lead to a “huge cliff edge” at the end of the year, when the Brexit transition period ends. Without a deal, sterling could fall as low as $1.10, he said.
Investors trimmed their bets on a weaker pound last week, according to the latest data from the Commodity Futures Trading Commission. They had generally shied away from big large speculative positions on the currency in recent weeks, given the potential for volatility, said analysts.
“The market is reluctant to take on much risk at this stage. You could see some crazy moves in the next few days,” said Lee Hardman, a currency strategist at MUFG Bank.