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Pound slumps before start of tough Brexit trading negotiations

Feb 03 2020 13:31
William Shaw

The pound is back in the doldrums after reports that Prime Minister Boris Johnson will effectively threaten to walk away from negotiations with the European Union without a formal trade deal.

Sterling fell more than 1% to lead losses among Group-of-10 currencies, wiping out last week’s advance. Johnson, and the EU’s chief negotiator Michel Barnier, are setting out Monday their planned positions for upcoming talks.

The drop marks a turnaround from the UK’s formal exit of the EU on Friday, when the currency achieved its best week since mid-December after the Bank of England helped support the currency Thursday by keeping interest rates unchanged. While the UK is now in a transitional phase without rule changes, it could still be heading for an economically messy divorce if a trade agreement can’t be reached by the end of 2020.

“The UK government wants to pursue a harder Brexit trading relationship to allow more room for policy divergence with the EU which is seen as one of the key benefits of Brexit,” said Lee Hardman, a foreign-exchange strategist at MUFG Bank. “It continues to pose downside risks for the pound in the year ahead.”

The pound fell 1% to $1.3076 by 10:05 a.m., after gaining 1% last week. It dropped 0.8% to 84.69 pence per euro.

Sterling’s rally on Friday came on the back of month-end flows that pressured the dollar across the board and may have exaggerated a sense of buoyancy for the U.K. currency. Options market gauges were relatively steady, with bets on pound gains in the short and medium-term still in demand. 

- With assistance from Vassilis Karamanis

brexit  |  pound
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