Pound Slumps Before Start of Tough Brexit Trading Negotiations

LONDON (Capital Markets in Africa)- The pound is back in the doldrums as concerns about a chaotic Brexit at the end of the year loom into view.

Sterling fell more than 1% to lead losses among Group-of-10 currencies, as traders brace for British Prime Minister Boris Johnson to threaten to walk away from talks with the European Union rather than accept demands from Brussels to sign up to the bloc’s single market regulations. The EU’s chief negotiator Michel Barnier is also due to set out his planned position on Monday.

The drop marks a turnaround from the U.K.’s formal exit of the EU on Friday when the currency achieved its best week since mid-December after the Bank of England helped support the currency Thursday by keeping interest rates unchanged. While the U.K. is now in a transitional phase without rule changes, it could still be heading for an economically messy divorce if a trade agreement can’t be reached by the end of 2020.

“The U.K. government wants to pursue a harder Brexit trading relationship to allow more room for policy divergence with the EU which is seen as one of the key benefits of Brexit,” said Lee Hardman, a foreign-exchange strategist at MUFG Bank Ltd. “It continues to pose downside risks for the pound in the year ahead.”

The pound fell 1% to $1.3076 by 10:05 a.m., after gaining 1% last week. It dropped 0.8% to 84.69 pence per euro.

Sterling’s rally on Friday came on the back of month-end flows that pressured the dollar across the board and may have exaggerated a sense of buoyancy for the U.K. currency. Options market gauges were relatively steady, with bets on pound gains in the short and medium-term still in demand.

Source: Bloomberg Business News