Pound sinks as UK steps up no-deal Brexit preparations

LONDON (Reuters) - Sterling fell more than 1% against the dollar on Tuesday as fears grew that Britain was preparing to undercut its Brexit divorce treaty and torpedo trade talks with the European Union.

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

The latest round of negotiations started on Tuesday, with Britain warning Brussels that it was ramping up preparations to leave without an agreement.

The EU has warned there will be no trade deal if Britain tries to override parts of the Withdrawal Agreement it signed in January. Such a move could jeopardise the whole treaty and create frictions in British-ruled Northern Ireland.

Sterling took another step lower after the head of the British government’s legal department quit. Newspapers reported he had left in response to suggestions that Prime Minister Boris Johnson was threatening to override the divorce deal.

The clock is ticking on an October deadline for a trade deal and the end of the status quo transition arrangement in late December.

“From today, it seems to me that the ‘no-deal’ is the most possible and probable - the only outcome - of the negotiations,” former European Commission chief Jean-Claude Juncker told a virtual summit on Tuesday hosted by Principal Global Investors.

“We should not forget that Brexit is a tragedy for everyone. It is a disaster. It is a move, taken by the British people, against history ... all of us, we will have to face negative consequences if there is no deal.”

After several months of sterling rallying against the dollar, the sudden return of fears about a no-deal Brexit has frightened investors and knocked 4 cents off the pound since the start of the month.

The pound dropped 1.1% to $1.3034, its weakest since Aug. 13, while it also fell heavily against the euro to a two-week low of 90.42 pence.

“I sense participants are turning bearish on elevated chances of a no-deal Brexit but do not have a short position or hedge on board to reflect the view,” said Neil Jones, head of hedge fund sales at Mizuho.

“We should be in store for a further pound sell-off.”

Graphic: Bearish sterling bets -

However, Gavin Friend, senior FX strategist at NAB, noted that, while the pound had fallen, it was not a large move.

“Why is sterling not falling faster than it is?” he said.

“There is a common view that lots of observers of the trade negotiations see all of the bluster we have been going through the last couple months as negotiating tactics.”

Implied sterling-dollar volatility also rose, with one-month volatility, the contract encompassing the early-October deadline for a deal, hitting 10% for the first time since mid-June.

Graphic: Sterling volatility -

Reporting by Maiya Keidan; Editing by Tommy Wilkes and Alex Richardson