Pound Extends Losses, UK and EU Still Far Apart in Talks

The Brexit-battered pound extended its losses against the dollar and the euro on Thursday, as investors became more cautious about the risk of Britain and the EU failing to agree on a Brexit deal, with just three weeks until the Dec. 31 deadline.

The pound dropped not long after 2200 GMT on Wednesday, when a dinner on Wednesday between UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen ended with both sides still “far apart”.

“At the current juncture, the balance of risks appears to be shifting to the downside for the pound as the end game approaches for Brexit talks,” Lee Hardman, currency analyst at MUFG, wrote in a note to clients. “Hopes for a last-minute trade deal are fading.

The pound extended its fall in early London trading, down 0.6% against the dollar at $1.3318 at 0829 GMT. Versus the euro it was down around 0.7% at 90.755 pence.

The British currency has been jittery on Brexit headlines, dropping in response to news suggesting a deal is unlikely and rising when hopes are raised. Many investment banks still think that a Brexit deal will be reached at the last minute.

Positioning on the pound is only slightly bearish – speculators have cut their net short position in recent weeks – meaning that a short squeeze is not expected in the event of a positive outcome.

ING FX strategists said that, although the pound is likely to trade “on the soft side” on Thursday as a result of the disappointing outcome of the Johnson and Von der Leyen dinner, they think that a deal will be eventually reached.

Britain’s transition period with the EU is due to end on Dec. 31. Until then, it remains in the EU single market and customs union, meaning that rules on trade, travel and business have stayed the same.

Next Sunday was set as a new deadline by which a decision about whether talks should continue will be made.

Options markets indicate that traders expect further price swings in the pound. Implied volatility gauges with a one-week maturity, for both cable and euro-sterling, rose to their highest since March overnight.

Elsewhere, Britain’s economic recovery almost ground to a halt in October, GDP data showed.

Reporting by Elizabeth Howcroft

Source: Reuters

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