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Sterling quakes amid no-deal Brexit fears

Sterling broke on a bad note on Thursday morning after the highly-anticipated talks between UK Prime Minister Boris Johnson and European Commission chief Ursula von der Leyen failed to culminate in a Brexit trade deal. Although an agreement to continue negotiating has reportedly been reached, hopes of a deal are becoming slimmer by the moment, as Foreign Secretary Dominic Raab warns that talks are “unlikely” to continue beyond Sunday.

“The pound weakened in the absence of a breakthrough during the talks,” says Khatija Haque, Head of Research & Chief Economist at Emirates NBD, “growing Brexit concerns continue to weigh on the GBP”.

The UK currency has weathered a significant drop over the past 24 hours, with the Pound-to-Euro exchange rate sinking 0.75% to trade at 1.09702 and the Pound-to-Dollar dropping 0.70% to 1.32917. The past few weeks have seen Sterling struggle with turbulence, after the allocation of post-Brexit fishing rights ended in a stalemate two weeks ago and pushed the currency down to fresh lows.

Today’s publication of the European Union’s no-deal contingency plan has added fuel to speculation that the UK will leave without a deal, stating: “While the Commission will continue to do its utmost to reach a mutually beneficial agreement with the UK, there is now significant uncertainty whether a deal will be in place on 1 January 2021”.

Meanwhile, the European Central Bank launched a €500bn stimulus package on Thursday afternoon, which has already seen the Euro gain 0.3% within minutes of the announcement.

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Both the UK and the EU have confirmed that the obstacles ahead remain substantial as negotiations appear to enter another final phase at the end of the week. A statement from the office of the Prime Minister read:

“The PM and Mrs von der Leyen agreed to further discussions over the next few days between their negotiating teams. The PM does not want to leave any route to a possible deal untested. The PM and Mrs von der Leyen agreed that by Sunday a firm decision should be taken about the future of the talks”.

Doubts that the UK will leave without a deal have ramped up in recent days nonetheless, with Joseph Capurso, Head of International Economics at CBA, commenting on what this means for Sterling: “We are not confident of a deal because the same three issues (fishing, governance and competition) remain unresolved. The bottom line is the near term risk to GBP/USD is for a sharp fall, something one week risk reversals are increasingly pricing”.

There is still not total consensus, however, as Jordan Rochester from Nomura adds: “We continue to expect a deal to be the final outcome, the timing is the tricky issue. If we are wrong and the UK opts for a no-deal Brexit, GBP would have a long way to fall”.

Pound Sterling LIVE weighed in, explaining: “If the EU and UK do find a way forward and strike a deal the Pound is widely expected by foreign exchange analysts to strengthen into year-end and through 2021 as a cloud of lingering uncertainty is finally lifted”.