Brexit deadlock fears push sterling to one-week lows

Sterling fell to a one-week low in volatile trading on Wednesday after the Sun newspaper's political editor said on Twitter that a Brexit deal is unlikely this week.

The Sun's political editor Tom Newton Dunn, citing a source in the Democratic Unionist Party, said there would be no Brexit deal done this week and hopes are fading fast in London that UK prime minister Theresa May will go back to Brussels on Thursday.

Market bets on sterling had shifted considerably in recent weeks towards betting on a breakthrough in Brexit negotiations with sterling rising to more than a two-month high last Friday.

Though the tentative deal was rejected on Monday, some market strategists such as Nomura believe there is a 70 per cent probability of a breakthrough in talks, though some traders say the latest headlines reduce those expectations even further.

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“This political ping-pong battle is really hurting investor sentiment towards sterling,” said Neil Jones, Mizuho’s head of currency sales for hedge funds in London.

Failure could mean a delay until February, adding to the risk of businesses scaling back investment plans in Britain as uncertainty clouds the outlook beyond Brexit in March 2019.

Sterling which was already down on the day, extended its drop to stand 0.6 per cent weaker at $1.3358 on the day. Against the euro, sterling was down half a percent on the day at 88.33 pence.

Hedging

High-frequency indicators of market positioning and options market hedging have also shifted markedly in recent weeks to show some optimism emerging on sterling, with the British currency hitting a two-month high last week.

But reflecting the growing pessimism about a conclusive breakthrough in talks before a crucial EU summit next week, some traders reported a pickup in activity in selling short-dated calls on sterling around the 2017 highs of $1.3653, hit in mid-September.

Selling calls ensure a steady premium income for trading desks but also reflect a growing view that it is unlikely to rise to those levels.

“The Brexit clock is ticking and the positions of the UK and the EU negotiations remain far apart and the risk of a “very hard” Brexit has risen,” said Didier Borowski, head of macroeconomic research at Amundi.

Against a trade-weighted basket, sterling held at 78.2, down more than 1 per cent over the last two days.

– Reuters