Sterling hits one-year low vs euro on fears of no-deal Brexit

LONDON (Reuters) - Sterling fell on Tuesday to its lowest against the euro in nearly a year after British Prime Minister Theresa May played down the consequences of Britain leaving the European Union next year without securing a deal with the bloc.

FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/File Photo

Failing to reach an agreement on trade relations with the EU “wouldn’t be the end of the world,” May told reporters as she headed to Africa to try to boost Britain’s trade ties ahead of Brexit in March 2019.

May’s comments - seen as undermining Chancellor Philip Hammond’s warnings about the economic damage from a “no-deal” Brexit - piled pressure on the pound.

The prospect of a no-deal Brexit is becoming increasingly feasible in the eyes of investors who are hedging against the risk of the currency tanking if Britain is left isolated from the EU, its largest trading partner.

Positions are hardening as the March deadline approaches.

German Foreign Minister Heiko Maas on Tuesday said the risk of a so-called hard Brexit was “not yet off the table” and France’s prime minister has asked his ministers to prepare contingency measures in case Britain crashes out of the EU.

The pound sank to 90.98 pence against the euro, its lowest since Sept. 11 last year and at 1540 GMT was down 0.3 percent on the day.

Against the dollar the pound was broadly flat at $1.2893.

In a note to clients, analysts at ING said the pound could fall to 92 pence in the coming weeks ahead of fraught Brexit negotiations.

“The economic indicators from the UK have been respectable recently, but the political uncertainty surrounding Brexit is too great,” said CMC Markets analyst David Madden.

Short positions on the pound are now at their highest since mid-2017, he said.

Britain’s Brexit minister Dominic Raab last week said that London could meet an informal October deadline to agree a deal, but EU leaders expect to miss the deadline and are likely to have to hold an emergency summit in November.

Market analysts say that most investors have already priced in a delay beyond October.

Reaching a deal is also only the first of several hurdles the EU and UK need to clear, such as parliamentary ratification of any agreement, before the March 2019 deadline.

Foreign exchange analysts have forecast that the pound will weaken to $1.20 in the event of a no-deal Brexit, a Reuters poll found this month.

Editing by Mark Potter and David Goodman