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”.

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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.

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”.

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