December 18, 2019 / 9:43 AM / 2 months ago

CORRECTED-Sterling extends losses as traders weigh up new hard Brexit risk

(Corrects 18-month sterling high figure to 1.3516 in paragraph 3)

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Elizabeth Howcroft

LONDON, Dec 18 (Reuters) - Sterling fell 0.2% on Wednesday as traders assessed the risk of a hard Brexit at the end of the year, with political news expected to take precedence over economic data.

Prime Minister Boris Johnson’s government on Tuesday ruled out an extension to the December 2020 deadline for negotiations on a trade deal with the European Union, creating a new Brexit cliff-edge and cutting short sterling’s post-election rally.

The pound fell on the news and has collapsed more than 3% from an 18-month high of $1.3516 struck after Johnson’s landslide victory in Thursday’s general election.

It was last down 0.2% versus the dollar, at $1.3105 . Against the euro it was down around 0.2% at 85.02 pence.

“This is a correction of the election euphoria, slowly but surely, as the realisation sets in that this whole Brexit drama is not over yet and just another deadline of a hard Brexit will be looming eventually at the end of the year,” said Thu Lan Nguyen, FX strategist at Commerzbank.

She said Brexit had come back onto the agenda more quickly than she had expected.

Johnson’s Withdrawal Bill is due to be debated in parliament, where he now has a majority, on Friday. Nguyen put an 80% probability on the chances of the plan to outlaw an extension to the negotiating period passing.

Nguyen said it was too early to assess the renewed risk of a hard Brexit, but the fact that Johnson missed his Oct. 31 “do or die” deadline for exiting the EU suggests that this Dec. 2020 deadline could also be extended.

This means Brexit will be in focus at the Bank of England’s meeting on Thursday.

“At least temporarily the market surely will be looking at the BOE, to get an idea of how to assess this Brexit risk — they have to make a statement about this as well,” Nguyen said.

Bank of England Governor Mark Carney warned on Tuesday evening that monetary policy tools risk becoming ineffective unless there is better cooperation from governments on trade and fiscal policy.

“Recent economic data releases from the UK suggest that the BoE will maintain a cautious stance tomorrow despite some grounds for optimism following the election,” MUFG analysts wrote in a note to clients. (Editing by Catherine Evans)

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