Sterling fell 1% against major peers yesterday as both sides issued downbeat assessments of the progress of talks
The EU’s chief Brexit negotiator, Michel Barnier, set a deadline of tomorrow to seal a trade deal with the UK.
British Prime Minister Boris Johnson is to travel to Brussels amid warnings that a deal is by no means a certainty.
Lee Evans, Head of Foreign Exchange Trading and Strategy at Bank of Ireland Global Markets, said the big swings in the pound exchange rate in recent days had followed a relatively stable period for sterling.
“There had been an absence of volatility since September. Some of it was down to Brexit fatigue setting in. Markets had become quite complacent about a deadline, but there’s been a big turnaround since Friday.”
The pound and euro would both likely suffer in the event of no trade deal, but it is expected the pound would take the bigger hit.
That would be a another blow for exporters here who will be dealing with new customs arrangements in January in any event, and possibly tariffs in the event of Britain and the EU trading on WTO terms come next month if no trade deal is struck.
Lee Evans said the potential upside to sterling in the event of a deal being struck would likely be muted.
“With vaccine developments and a reopening of the economy, the services sector should give the UK economy a boost which could boost the pound. But the upside to sterling will be somewhat limited given that Brexit is going to change things for UK businesses in particular,” he said.
Meanwhile, Edward Moya, Senior Market Analyst with Oanda, said investors continue to place bearish hedging positions against the pound as they doubt a deal will be struck by tomorrow’s ‘artificial’ deadline.
“Sand is running out of the Brexit hourglass as the UK seems to have ruled out extending the Brexit transition period. Hopes for a weekend deal were unrealistic as both sides need to show that they are fighting for the best possible trade deal,” he said.
“The true deadline will likely be at some point at the end of this week, which could mean a week full of drama could start to weigh on the pound,” Mr Moya added.