Sterling stuck near two-week low as Brexit rhetoric sharpens

LONDON (Reuters) - Sterling steadied on Wednesday as Prime Minister Theresa May tried to persuade the European Union to modify her Brexit deal to avoid a disorderly British departure from the bloc.

FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier

EU Council President Donald Tusk said on Wednesday that he would make no new offer on Brexit and those who promoted Britain’s exit without any understanding of how to deliver it deserve a “special place in hell”.

The sharpening of rhetoric did not budge the pound much, with investors focused instead on plans to get a deal across the line.

The United Kingdom is on course to leave the EU on March 29 without a deal unless May can persuade the bloc to reopen the divorce deal she agreed in November.

The pound has been supported in 2019 by a growing belief that a last-minute agreement will avert a no-deal Brexit. But jitters have returned since a Jan. 29 vote in parliament that asked May to persuade the EU to accept changes to the Brexit agreement.

Sterling on Wednesday was flat at $1.2954, not far off a two-week low of $1.2923. It was up 0.2 percent against the euro at 87.85 pence.

Earlier in the session the currency was lifted by a report that UK cabinet ministers are discussing plans to delay Brexit by eight weeks.

The pound has previously rallied on signs that the March 29 date for Britain to leave the European Union could be pushed back, with traders betting it would reduce the chances of a disorderly no-deal Brexit.

Sterling slumped to a two-week low on Tuesday after a survey suggested the British economy was flat-lining.

“Whilst May is no closer to securing any variation on her current Brexit proposal, at this price pound traders are still confident that the UK won’t crash out of the EU with no deal in place,” said senior market analyst Fiona Cincotta at City Index.

Other analysts, though, say the risk of a no-deal Brexit has yet to be fully priced in.

“I can understand that speculative market participants are ready to bet on the GBP recovery. However, that should not prevent the market from reflecting the changing likelihood of a ‘no deal’ proportionately in the GBP exchange rates,” said Ulrich Leuchtmann, an FX strategist at Commerzbank in Germany.

“I do not consider GBP weakness during this time to be sufficiently priced in.”

With another parliament vote due in mid-February, derivatives markets are painting a cautious outlook for the pound with shorter-dated risk reversals indicating a greater bias for sterling puts over calls.

Little clarity is expected on interest rates from a Bank of England meeting on Thursday. Rates last went up in August 2018. The next move will probably hinge on how Brexit plays out.

Sterling will gain between 2 and 5 percent if Britain parts ways with the EU with a deal in place but will slump between 5 and 10 percent in the event of a chaotic Brexit, a Reuters poll found on Wednesday.

Reporting by Tom Finn; Editing by Janet Lawrence and Frances Kerry