Sterling sank to two-week lows against the dollar on Tuesday, extending losses as fears grew that Britain was preparing to undercut its Brexit divorce treaty and potentially torpedo its trade talks with the European Union.
The latest round of negotiations starts later on Tuesday but the EU has warned there will be no trade deal if Britain tries to override parts of the Withdrawal Agreement it signed in January, jeopardising the whole treaty and creating frictions in British-ruled Northern Ireland.
Tensions have flared anew even as the clock ticks down to an October deadline for a trade deal and then the end of the status-quo transition arrangement in late December. Britain’s top negotiator David Frost said on Tuesday the country was ramping up preparations to leave without a deal.
The pound was down more than 0.5% at $1.3105 by 0900 GMT while against the euro it touched 90.11 pence, also a two-week low .
“I sense participants are turning bearish on elevated chances of a no-deal Brexit but do not have a short position or hedge on board to reflect the view,” said Neil Jones, head of hedge fund sales at Mizuho.
“We should be in store for a further pound selloff.”
However, Gavin Friend, senior FX strategist at NAB, noted that while the pound had fallen, it wasn’t a large move.
“Why are FX reactions not reacting more? Why is sterling not falling faster than it is?”
“There is a common view that lots of observers of the trade negotiations see all of the bluster we have been going through the last couple months as negotiating tactics.”
“What both sides are trying to do is ensure a free-trade agreement with no tariffs and where the UK can retain access to the single market, and the EU is saying you can have this but you have to give us something that says you’re not going to go and de-regulate and have a competitive advantage.”
Implied sterling-dollar volatility also rose, with one-month volatility, the contract encompassing the early-October deadline for a deal, reaching 10% for the first time since mid-June .