LONDON (Reuters) - Sterling fell 1% on Wednesday as investors’ focus shifted back to the possibility of negative interest rates in Britain and on comments from government officials that not much progress had been made in Brexit negotiations.
Britain told the European Union on Wednesday it needed to break a fundamental impasse to clinch a Brexit trade deal by the end of the year and said an agreement on fisheries might not be ready by July.
Britain’s negotiator with the EU, David Frost, also reiterated that the UK would not extend the Brexit transition period beyond December.
The United Kingdom left the EU on Jan. 31 but the main terms of its membership remain in place during a transition period until the end of this year, allowing it time to negotiate a new free trade deal with the bloc.
Failure to reach a deal would convulse global trade just as the world aims to exit the coronavirus lockdown. But so far the talks have not gone well - and that was the only thing on which both sides agreed at the end of the last round.
“Whilst a classic last-minute EU fudge is still broadly anticipated by the market, the language from David Frost was not optimistic,” said Neil Wilson, chief market analyst at markets.com.
“Undoubtedly, sterling becomes increasingly exposed to headline risks around Brexit as we move out of the worst of the COVID-19 pandemic and back into the cut-and-thrust of negotiations,” Wilson said.
Bank of England Chief Economist Andy Haldane on Tuesday played down the prospect of imminently taking rates into negative territory, saying that “reviewing and doing are different things.”
But analysts believe that once the talk of negative rates has taken hold in the markets, it would be hard to shift the focus away from it.
“The door has been opened to the prospect of negative rates given the BoE clearly before has explicitly ruled out negative rates,” said Derek Halpenny, head of research at MUFG. “We do not see Haldane’s comments yesterday as a signal of a reversal of the negative rate speculation.”
Halpenny said he has gone short sterling/Japanese yen on a short-term basis “to capture the ongoing underperformance of the pound due to negative rate speculation”.
The pound was last down 1.1% at $1.2209 GBP=D3, losing all Tuesday's gains. It dropped 0.9% versus the euro as well to 89.93 pence EURGBP=D3, a six-day low, as the strong 90-pence barrier held on.
GRAPHIC: Pound falls vs. euro - here
Reporting by Olga Cotaga; Editing by Gareth Jones and Nick Zieminski