Pound slumps before start of tough Brexit trading negotiations

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