February 6, 2020 / 4:54 PM / 12 days ago

Sterling struggles as EU trade talk fears weigh on sentiment

LONDON (Reuters) - Sterling extended losses on Thursday as concerns about negotiations between Britain and the European Union for a post-Brexit trade deal continued to rattle investors.

FILE PHOTO: A bureau de change advertises it's currency exchange rates in London, Britain October 12, 2016. REUTERS/Peter Nicholls

The pound continued to fall after taking a big drop on Wednesday, which some analysts said was exacerbated by a media report that indicated the EU would look to re-write a major set of European financial regulations known as Mifid II.

It fell as low as $1.2933 against the U.S. dollar, its weakest since Dec. 25, and was last down 0.5% on the day. The pound also fell 0.3% against the euro at 84.86 pence.

More news emerged on the uncertainty of Britain’s relationship with the European Union when a transition period for its exit from the bloc wraps up at the end of the year.

British financial services firms will get no access to European Union markets after Brexit unless they agree to respect EU rules, French Finance Minister Bruno Le Maire said on Thursday.

“It’s very hard to square the circle. We’ve gone from a place where the market expected common ground to be found to a place of brinkmanship again,” said Jordan Rochester, FX strategist at Nomura.

He said Thursday’s moves were part of a broader trend downward. The pound is 2% lower against the dollar this week after Prime Minister Boris Johnson said Britain does not accept the EU’s rules to strike a comprehensive free trade deal with the bloc on Monday.

“In terms of what’s driving it right now this second, it’s just breaking of key levels,” Rochester said, citing the currency’s fall below $1.2950, which he said had been a key level of support.

The dollar continued to rise on Thursday after surging across the board the previous day after better-than-expected employment data underlined the relative strength of the U.S. economy.

Investors are nervous that British Prime Minister Johnson is taking a hard line in the trade talks with the EU, which need to be concluded before the end of the year to avoid a potentially disruptive break in trading relations.

“While GBP benefited from the risk rally in the middle of the week, its gains vs EUR and USD have been limited as the overhang of upcoming UK-EU negotiations limits GBP upside potential,” ING analysts said in a note.

“We continue to expect the periods of GBP rebounds to be shallow and short-lived.”

Britain has committed to applying EU rules during the transition period that ends in December, but has said that at the end of the transition period it will be able to review and implement its own regulations.

Reporting by Tommy Reggiori Wilkes and Yoruk Bahceli; editing by Nick Macfie and Ken Ferris

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