Sterling fell by 1.5% on Monday after Prime Minister Boris Johnson set out tough terms for Brexit talks with the European Union, rekindling fears Britain would reach the end of an 11-month transition period without agreeing a trade deal.
The sides have until the end of the year, when a transition period expires, to secure a deal on trade and future relations. But Johnson is striking a tough tone, saying Britain will not adhere to the bloc’s rules and regulations.
The EU on the other hand has warned Britain that access to its single market of 450 million people will depend on how far London agrees to adhere to such rules on environmental and labour regulations.
“Sterling appears to be coming off on the not-very-encouraging signs from the two sides at the start of the negotiations. They are positioning themselves at two extremes,” said Adam Cole, chief currency strategist at RBC Capital Markets in London.
The moves came as risk appetite stabilised following big falls on Chinese markets, as Beijing took steps to shore up its economy, hit by travel curbs and business shutdowns because of the coronavirus outbreak, including cutting interest rates.
By 1618 GMT the pound was down at $1.3013 in its biggest one-day fall since Dec. 17. Against the euro it had lost 1.1% to 84.97 pence.
The currency had ended January on a high, with the best weekly gain in a month after the Bank of England kept interest rates steady at 0.75%, surprising some who had expected a 25 basis point cut.
“It is clear that for thousands of business across the UK and Europe, there is a lot riding on the outcome of the UK/EU future arrangement talks. Until more clarity emerges we expect sterling to be vulnerable,” said Rabobank’s senior currency strategist Jane Foley.
Some of Monday’s losses were also due to the dollar reversing some of its weakness from last week.
While investors are more upbeat on sterling than before the Dec. 12 election, newsflow from the trade talks should become a factor for the currency as the two sides spar over terms.
“This will probably characterise negotiations over the next 9-10 months and stands to drag cable back to the lower end of its $1.29-$1.35 range,” ING analysts told clients.
Positioning data from the U.S. Commodity Futures Trading Commission showed speculators’ bullish bets on sterling had moderated in the week to Jan. 28 but remained broadly intact.
Nor is there much sign derivatives are pricing big sterling swings, with one-month as well as one-week implied volatility gauges subdued.
The implied volatility premium to buy one-month sterling ‘calls’ over puts — options conferring the right to buy and sell, respectively — remains in place over a one-month period.
