Sterling softens as traders stay focused on EU-UK talks

The pound continued to struggle on Tuesday as investors debated Britain’s chances of striking a post-Brexit trade deal with the EU in make-or-break talks this week.

The currency weakened to $1.3291 after British officials reported “no tangible progress” in UK-EU trade talks, but regained some ground when the UK said it would ditch parts of a controversial bill that breached Britain’s withdrawal treaty. By the evening, it was down 0.1 per cent at $1.3365.

The move by Boris Johnson’s government on the previously agreed treaty was seen as a gesture that boosted chances of the two sides sealing a deal.

Sterling has risen steadily against the dollar since mid-September, boosted by expectations that some form of agreement could be reached, although it has been more volatile in recent months than the dollar and the euro.

This week, one-month implied volatility for sterling, a measure of expected price swings over the period, has hit its highest level since the first days of April, following a coronavirus-induced sell-off of global assets in March.

“This doesn’t tell you markets are pricing in no deal,” said Trevor Greetham, investment strategist at Royal London Asset Management. “But it tells you market participants are anxious.”

Brexit talks were driving swings in the currency, said Christopher Jeffery, investment strategist at Legal & General Investment Management, because a no-deal outcome could deepen Britain’s economic contraction and prompt the Bank of England to introduce negative interest rates for the first time.

Investors had unwound earlier bets the BoE would make such a move. “People are once again making the link that if we do make a no-deal outcome we will have the negative rates debate back on the table,” Mr Jeffery added.

The FTSE 100 index spent most of Tuesday’s session 0.5 per cent lower, before closing up 0.1 per cent.

Global stock markets were mixed on Tuesday after losing ground in the previous session. By early afternoon in New York, Wall Street’s S&P 500 was up 0.3 per cent, the tech-heavy Nasdaq Composite was flat and Europe’s Stoxx 600 closed 0.2 per cent higher.

The oil price, which was buoyed last week by the Opec+ group agreeing to curtail planned increases in production, drifted. Brent crude, the international benchmark, was up 0.2 per cent to $48.88 a barrel. WTI, its US counterpart, was down 0.2 per cent at $45.69.

“Markets are consolidating,” said Ben Laidler, chief executive of Tower Hudson Research, after global stocks, as measured by the FTSE All-World index, climbed more than 12 per cent in November and continued rallying in the first few days of this month.

“You’ve had two big themes: coronavirus vaccines and the possibility of US [economic] stimulus,” he added. “But investors are concerned about markets getting too far ahead of the current macroeconomic situation.”

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