Sterling slips further as spectre of no-deal Brexit hangs over markets

The pound was on track for its biggest two-day fall in nearly two years on Wednesday before a late rally as concerns rose that Britain could still crash out of the European Union without a trade deal in place at the end of a transition period in December 2020.

Prime minister Boris Johnson’s government on Tuesday ruled out an extension to the December 2020 deadline for negotiations on a trade deal with the European Union, creating a new Brexit cliff-edge and cutting short sterling’s post-election rally.

“Johnson’s plans highly increase the chances that the UK stumbles out of the EU without a trade agreement given the short timeline for official negotiations,” Scotiabank analysts said. Investment bank JPMorgan sees an “uncomfortably high” 25 per cent chance of a no-deal Brexit.

The pound tumbled 0.5 per cent on Wednesday to $1.3070, after falling 1.5 per cent on Tuesday, taking losses over the last two days to nearly 2 per cent for its biggest losing streak since February 2018. It later rallied slightly to trade at $1.3085.

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It is now nearly 3.4 per cent below the 18-month high above $1.3516 struck after Mr Johnson’s landslide victory in last Thursday’s general election.

Against the euro it was down around 0.2 per cent at 85.07 pence .

"This is a correction of the election euphoria, slowly but surely, as the realisation sets in that this whole Brexit drama is not over yet and just another deadline of a hard Brexit will be looming eventually at the end of the year," said Thu Lan Nguyen, FX strategist at Commerzbank. She said Brexit had come back onto the agenda more quickly than she had expected.

The sterling wobble comes as Mr Johnson issued a strong message that his government will remain focused on delivering Brexit by banning his ministers from attending the World Economic Forum in Davos, Switzerland, next month.

The prime minister, who will also not attend, said he wants to “get on with delivering the priorities of the British people”.

Mr Johnson’s Withdrawal Bill is due to be debated in parliament, where he now has a majority, on Friday. Ms Nguyen put an 80 per cent probability on the chances of the plan to outlaw an extension to the negotiating period passing.

Ms Nguyen said it was too early to assess the renewed risk of a hard Brexit, but the fact that Johnson missed his October 31st “do or die” deadline for exiting the EU suggests that this December 2020 deadline could also be extended.

Brexit risk

This means Brexit will still be in focus at the Bank of England’s meeting on Thursday. “At least temporarily, the market surely will be looking at the BoE, to get an idea of how to assess this Brexit risk – they have to make a statement about this as well,” Ms Nguyen said.

Bank of England governor Mark Carney warned on Tuesday that monetary policy tools risk becoming ineffective unless there is better co-operation from governments on trade and fiscal policy.

Money markets are pricing in about a 60 per cent probability of a quarter point interest rate cut by next October, slightly higher than the around 40 per cent just after the election result was announced last Friday.

“Recent economic data releases from the UK suggest that the BoE will maintain a cautious stance tomorrow despite some grounds for optimism following the election,” MUFG analysts wrote in a note to clients. – Reuters