Pound falls on threat to Brexit divorce deal

(Reuters) - Sterling fell on Monday against the U.S. dollar and the euro as Brexit talks plunged into crisis following Britain’s threat to override its European Union divorce deal.

FILE PHOTO: Pound banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

Britain is reportedly planning new legislation that will override key parts of the Brexit Withdrawal Agreement - a step that, if implemented, could jeopardise the January treaty and cause frictions in Northern Ireland.

Implied volatility gauges spiked in nearly all maturities, with six-month options contracts - which incorporate the end of the transition period - hitting their highest cost since July 2 at 9.5%. One-month vols also picked up to their highest since end-June.

Britain left the EU in January but has until the end of this year to forge a post-Brexit trade deal with the bloc, during a so-called transition period. However, both parties have given October as a self-imposed deadline.

With just a few weeks to run until then, any negative Brexit-related headline prompts traders to sell the pound, already beset by woes.

Monday’s news “is just the cherry on top of the cake,” said Jordan Rochester, currency analyst at Nomura.

“We’ve had weeks of pretty negative stories about the UK doubling its fishing quota, which would be not agreed to by the EU. We’ve got the state aid regimes still not being laid out as well by the UK side. So I think sterling is going to underperform here,” he said.

Rochester expects the British pound to continue falling against the euro over the next weeks as the EU summit in mid-October gets near, forecasting the pound should trade around 92 pence going into the meeting.

“And if we do get an actual announcement of no deal, prepare for a hard Brexit, the pound should continue to weaken, we’re talking something like 95 to 98 pence against the euro,” he said.

By 0815 GMT, the currency was down 0.3% at $1.3238, while against the euro, it touched a one-week low of 89.60 pence.

Reporting by Olga Cotaga; Additional reporting by Sujata Rao; Editing by Andrew Cawthorne