Sterling slumps to 11-month low after Fox says no-deal Brexit likely

LONDON (Reuters) - The pound sank to an 11-month low on Monday as comments by officials about Brexit stoked fears among investors that Britain could soon crash out of the European Union without securing a trade agreement.

An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration

With less than eight months until Britain quits the EU, the government has yet to agree a divorce deal with Brussels.

The saga over Brexit has come to dictate the pound’s fortunes as fears mount about the impact it would have on Britain’s trade.

Investors are growing edgy about the currency’s outlook despite signs the economy is improving and the Bank of England raising of interest rates last week for only the second time in over a decade.

British trade secretary Liam Fox, a prominent Brexit supporter in Prime Minister Theresa May’s cabinet, said over the weekend the odds of Britain leaving the EU without agreeing on a deal stood at 60-40.

“The voices forecasting a hard Brexit are becoming increasingly shrill. The FX market is slowly beginning to work out that these people might successfully torpedo a constructive solution,” said Commerzbank currency strategist Ulrich Leuchtmann in Frankfurt.

Sterling on Monday fell to $1.2920, its lowest since July 19, before settling down half a percent on the day GBP=D3. It slumped 0.4 percent against the euro to 89.33 pence and was the biggest loser among major currencies against a broadly strong greenback.

Speculators’ net short pound positioning slid to its highest level in 10 months, according to calculations by Reuters.

Prime Minister May still believes that Britain will negotiate a good Brexit deal with the European Union, her spokesman said on Monday.

But British voters’ approval of her handling of Brexit negotiations has fallen to 22 percent, according to pollster ORB International, the lowest figure it has recorded.

If Britain fails to agree the terms of its divorce with the EU and leaves without a transition agreement, it would revert to trading under World Trade Organization rules.

Most economists think that would cause serious harm to the world’s fifth largest economy as trade with the EU, Britain’s biggest market, would become subject to tariffs.

Supporters of Brexit say there may be some short-term pain for Britain’s $2.9 trillion economy, but that long-term it will prosper when cut free from the EU.

On Friday, Bank of England Governor Mark Carney said the chances of a no-deal Brexit had become “uncomfortably high”.

Reporting by Tom Finn; Editing by Andrew Roche