LONDON: The pound fell on Thursday against a rebounding dollar in generally cautious global markets, while sterling traders awaited hints about the likelihood of the UK and European Union reaching a post-Brexit trade deal before the Dec. 31 deadline.
Britain left the EU in January and both sides are in talks on a future trading relationship after Britain loses access to the customs union and single market in 2021.
Direct talks were suspended after a member of the EU team tested positive for COVID-19 – but talks will continue in line with health guidelines.
Investors had become more optimistic about the chance of a deal in recent days, with the pound gaining against the dollar for four days running. But some analysts expressed caution, citing a media report that EU leaders will demand the European Commission publish plans for what will happen if there is no deal.
“Sentiment remains confident with regards to a Brexit deal of some form being put together,” said Neil Jones, head of FX sales for financial institutions at Mizuho, noting that the pound remains near recent highs against the dollar and euro.
“Why it’s come off today is probably more a function of a little bit of risk aversion in the stock markets,” he said. “That appears to be a function of the latest COVID numbers, and what that’s done for FX is put some of the safe haven U.S. dollar demand back into play.”
At 1634 GMT, the pound was down 0.3% versus the dollar, at $1.323. Versus the euro, it was down around 0.2% at 89.525 pence per euro.
Jones said expectations for a deal have grown to around 80-85%, meaning there will be a market shock if there is not one.
Britain’s trade minister, Liz Truss, said Britain is determined to reach a trade deal with Canada before year end. A Canadian government source said a free trade deal announcement could come in the next few days.
EU leaders will meet on a video call later on Thursday to discuss the COVID crisis, which analysts said could include talk about the region’s recovery fund and put pressure on the euro.
MUFG strategist Lee Hardman said the options market and positioning data suggest little Brexit risk premium is priced into the pound, with a deal expected early next week or in the first week of December.
“There is likely to be a much larger pound move to the downside if both sides fail to reach a deal (-5% to -10%), while we expect a modest move to the upside for the pound if a deal is finalized (+1% to +4%),” he said.