Sterling slides as EU leaders press for elusive Brexit trade deal

LONDON (Reuters) - Sterling weakened sharply on Thursday, sent lower by concerns about the obstacles keeping the European Union and Britain from reaching a Brexit trade deal, and a broadly stronger dollar added to the pound’s woes.

FILE PHOTO: Pound coins are placed on broken glass and British flag in this illustration picture taken January 31, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

The currency had risen in recent sessions, propelled by a sense that Britain and the EU, whose leaders are meeting on Thursday, will secure a trade deal before the end of December, when Britain’s transition period after leaving the EU runs out.

But sterling remains five cents off a 2020 high of nearly $1.35 hit in early September. Many investors reckon that even if a deal is reached with Brussels, it will be of limited scope.

British Prime Minister Boris Johnson had proposed an Oct. 15 deadline to conclude talks for an agreement but EU leaders were meeting on Thursday to approve extending the negotiations. They want concessions on the contentious subjects of fisheries, fair competition and dispute resolution, and said on Thursday they would not compromise at any cost.

Johnson has said he is willing to end the transition period without a trade deal, but many in the market have called his bluff. Although volatility has risen, sterling has not seen the same plunges that it suffered in 2018 and 2019 before previous Brexit deal deadlines.

“We are positioned neutrally on sterling, but given the negative news flow we might look to take a contrarian view on the currency as any deal would trigger a relief rally,” Justin Onuekwusi, portfolio manager at Legal & General Investment Management.

Sterling dropped as much as 0.9% to $1.2891, its slide exacerbated by traders buying dollars amid a market-wide rush to safety. The pound had traded as high as $1.3030 in Asian hours.

The euro gained 0.5% versus the British currency to 90.73 pence. That compares with a level of 88.66 pence in early September, before it fell to 92.90 pence by the middle of the month after London said it would undercut its earlier divorce treaty with Brussels.

Goldman Sachs said on Thursday that a “thin” Brexit trade deal was likely to be struck by early November.

Sterling vs U.S. dollar:

Commerzbank analyst Ulrich Leuchtmann said “constant postponement” of deal deadlines seemed plausible, calling Brexit “the unsolvable permanent subject.”

“In this scenario sterling remains trapped in a state of suspense, which is roughly marked by the range of 0.85 to 0.95 in euro-sterling,” he said.

Additional reporting by Saikat Chatterjee; editing by Gareth Jones and Mark Heinrich