Markets News

UPDATE 1-Pound falls 0.3% as hard Brexit risk overshadows economic news

* Graphic: World FX rates in 2019

* Graphic: Trade-weighted sterling since Brexit vote (Updates prices, adds CPI data, Bank of England detail)

LONDON, Dec 18 (Reuters) - Sterling fell 0.2% on Wednesday as traders assessed the risk of a hard Brexit at the end of the year, with political news dominating over economic data.

Prime Minister Boris Johnson’s government on Tuesday ruled out an extension to the December 2020 deadline for negotiations on a trade deal with the European Union, creating a new Brexit cliff-edge and cutting short sterling’s post-election rally.

The pound fell on the news and has collapsed more than 3% from an 18-month high of $1.3516 struck after Johnson’s landslide victory in Thursday’s general election.

It was last down 0.3% versus the dollar, at $1.3097 . Against the euro it was down around 0.1% at 84.94 pence.

“This is a correction of the election euphoria, slowly but surely, as the realisation sets in that this whole Brexit drama is not over yet and just another deadline of a hard Brexit will be looming eventually at the end of the year,” said Thu Lan Nguyen, FX strategist at Commerzbank.

She said Brexit had come back onto the agenda more quickly than she had expected.

Johnson’s Withdrawal Bill is due to be debated in parliament, where he now has a majority, on Friday. Nguyen put an 80% probability on the chances of Johnson succeeding in his plan to outlaw an extension to the negotiating period.

She said it was too early to assess the renewed risk of a hard Brexit, but the fact that Johnson missed his Oct. 31 “do or die” deadline for exiting the EU suggests that this Dec. 2020 deadline could also be extended.

With the Bank of England meeting on Thursday, markets will look to it for guidance on how to react to Johnson’s policy.

“At least temporarily the market surely will be looking at the BOE, to get an idea of how to assess this Brexit risk - they have to make a statement about this as well,” Nguyen said.

With Brexit in focus, CPI data showing inflation still at a three-year low did little to move the pound.

The data is unlikely to shift expectations that two of the Bank of England’s nine policy officials will vote to cut rates at this week’s meeting.

The Bank of England is due to name a successor to governor Mark Carney on Friday. He will step down on Jan. 31 - the day the UK is due to leave the EU and enter its transition period.

The BBC reported on Oct. 31 that Minouche Shafik - the bank’s deputy governor between 2014 and 2017 - was the government’s favourite candidate.

Editing by Mark Heinrich