On Monday, the British pound declined by 1% to reach two-and-a-half lows, as investors became concerned over the chances of the European Union and Britain failing to agree to a Brexit trade deal, as last-minute talks once again resumed in Brussels. This sharp decline was a complete U-turn from Friday when the market sentiment had been quite positive, as sterling had risen above the value of $1.35 for the first time in 2020. According to a senior diplomat for the European Union, Michel Barnier, the chief Brexit negotiator for the European Union, was ‘rather downbeat’ about the possibility of a deal.
Ursula von der Leyen, the President of the European Commission, and British Prime Minister Boris Johnson will be reviewing the situation and speaking on call on Monday evening. Overnight, the pound had remained steady, but had begun to slip in early London trading. Not long after 0800 GMT, sterling had begun to drop sharply when it was reported by the newspaper The Sun that Johnson was preparing to pull out of Brexit negotiations ‘within hours’ unless the demands of the European Union change. The pound had declined by 1.2% against the US dollar at 0836 GMT and was trading at $1.328.
As compared to the euro, the pound had fallen by 0.9% and had reached 91.06 pence, which is the weakest it has been in the last six months. Analysts said that markets had chosen to overlook the negative headlines in the previous week, but had now gotten jittery to any bad news. Therefore, the suggestion that there could be a withdrawal from the negotiations ended up having an inevitable impact on the pound. However, there is a good chance that this ultimatum will not be fulfilled. After all, neither of the parties want to be the one to concede and all the recent incidents have shown that there may be an end in sight after all.
As long as both parties continue to remain at the table, there is a possibility that the outcome will be favorable and they will end up agreeing to a Brexit trade deal. There was a jump in the implied volatility gauges of the Sterling with one-week and overnight maturities, which reached their highest level since March. This indicated that traders are preparing for future movements in price. There was also a surge in risk reversals, which is a derivative used for hedging risks. In the last few weeks, sterling traders have become more optimistic about a trade deal being reached.
According to the CFTC positioning data, speculators had reduced their net short position on the currency in the week leading to December 2nd, which was the lowest in five weeks. Analysts said that traders don’t expect a no-deal Brexit, but they believe it will be highly compromised. Analysts are focusing on the summit of EU leaders on 10th to 11th December as a possible deadline for reaching a deal. The draft Internal Market Bill of the UK is also due to go back before the parliament on Monday.