LONDON, Oct 8 — Sterling touched a one-month low against the euro today as investors took fright at reports that Brexit talks between Britain and the European Union were close to breaking down.
With 23 days before the United Kingdom is due to leave the bloc, there is no sign the impasse between London and Brussels could be bridged and both sides are jostling to avoid blame for a delay or a disorderly no-deal Brexit.
Britain’s proposals to replace the Irish “backstop” — an insurance policy to keep the border open between the Republic of Ireland and the British province of Northern Ireland — has been rebuffed by EU leaders.
The pound tumbled today after a Downing Street source said German Chancellor Angela Merkel and British Prime Minister Boris Johnson had spoken and that she had made clear a deal was “overwhelmingly unlikely”.
The source said that if the call represented a new position, it meant a deal was impossible “not just now but ever”.
European Council President Tusk accused Johnson of playing “some stupid blame game”.
By 1215 GMT, the pound was down 0.5 per cent at US$1.2226 (RM5.13), having earlier threatened to fall below the US$1.22 mark. It weakened more than 0.7 per cent against the euro, touching a low of 89.95 pence — its weakest since September 9 .
“The pound has taken a lurch lower as (reports say) there is no prospect of a deal,” said Michael Hewson, chief market strategist at CMC Markets.
But he noted that a law passed last month by parliament requires Johnson to seek a delay to Brexit if a deal with the EU has not been agreed by October 19.
“(Sterling) is reacting to the newsflow, which is negative. But at some point it has to react to the reality, which is that there will be an extension and elections,” Hewson added.
The opposition Labour party called for lawmakers in parliament to unite to prevent a no-deal Brexit taking place at the end of October.
Analysts say a Brexit delay leading to a UK election has already been priced in as the most probable outcome.
There are also signs that markets are not overly perturbed by the prospect of a no-deal Brexit. While Johnson has repeatedly vowed to take Britain out of the EU on October 31 even without a divorce deal in place, sterling-dollar implied volatility gauges maturing around the deadline were little affected by the pound’s moves.
However, data has repeatedly highlighted the extent of potential damage from a no-deal Brexit. A report by the Institute for Fiscal Studies published today said leaving without a deal could double Britain’s budget deficit to around £100 billion.
The political jitters, and signs of economic deterioration fuelled a rally in British government bonds, with 10-year yields slipping almost four basis points to 0.41 per cent, the lowest since early-September. — Reuters
