BackPound falls as optimism fades in last-ditch Brexit negotiations
The pound declined as investors questioned how close Britain and the European Union really are to sealing a trade agreement
PremiumThe pound declined as investors questioned how close Britain and the European Union really are to sealing a trade agreement.
Sterling extended its drop after The Sun reported that UK Prime Minister Boris Johnson is ready to pull out of talks within hours. The two sides are still at odds over their longstanding disagreement over fishing.
The currency retreated as much as 1.6%, while government bonds advanced. Money market are now pricing in a 10-basis-point cut in interest rates by the end of next year. That would lower borrowing costs to 0%. And the FTSE 100 benchmark index, which has a negative correlation with the pound, was little changed, while the Stoxx Europe 600 fell 0.7%.
Traders had speculated on a weekend deal, but pessimism is solidifying, with the relative cost of hedging a weaker sterling over the coming month staging its longest advance in 17 years.
“At some point everyone has to say the risks are too high to hold any exposure with this yo-yo of optimism and pessimism," said Jordan Rochester, a currency strategist at Nomura International Plc. “The risk now is that optimism turns to pessimism and we have to hedge for a no-deal Brexit."
Hopes that the EU and U.K. can reach a deal boosted the pound by about 8% against the dollar since June through the end of last week, with traders assuming that negotiators would reach a last-minute resolution after more than four years of Brexit drama. That sent the pound to a two-year high of $1.3539 on Friday.
Yet traders are getting jumpy, with the cost of insuring sudden moves in the pound in the coming week reaching its highest since early April. Many investors expect an agreement, which leaves the currency vulnerable to any setbacks that could undermine that assumption.
The pound could rise 2% to 3% on a deal, but failure to reach agreement could see the currency drop as much as 8%, said Lee Hardman, a currency analyst at MUFG.
Sterling traded down 1.6% to $1.3229 as of 9:06 a.m. in London, and the yield on 10-year bonds fell five basis points to 0.30%.
“We’d leave gilts well alone," said John Wraith, head of U.K. and European rates strategy at UBS Group AG. “We try and filter out the noise and briefings, and still think both sides have a very strong incentive to reach a deal. That said, it will inevitably be very late in the process, and the sound and fury will continue to swirl in the meantime."
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