LONDON (Reuters) - The British pound fell on Wednesday on growing concern that the Brexit transition period will end without a deal between Britain and the EU, and on the foggy economic prospects for the country as it looks to emerge from its coronavirus lockdown.
The fact that the United Kingdom, now out of the European Union, will not be part of the bloc’s 750 billion euro recovery package “is not helping the pound,” said Kenneth Broux, head of corporate research at Societe Generale.
On top of that, euro/sterling may be bouncing off the lows it fell to recently when central banks were possibly rebalancing their reserve requirements, Broux said.
Britain’s debt levels are rising as it scrambles for ways to prevent a possible wave of COVID-19-induced unemployment. Broux said flash Purchasing Managers’ Index (PMI) readings for July this week are likely to highlight the divergence between Britain and the continent’s big economies.
Data on Tuesday showed British government borrowing hit a record 127.9 billion pounds in the first three months of the financial year that began on April 1.
Sterling was last trading flat versus the dollar at $1.2736 but versus a broadly stronger euro it was 0.5% lower at 90.98 pence. Broux said it was unlikely that euro/sterling was establishing a new range above 90, however, as those levels “typically don’t endure a long time”.
Graphic: Sterling falls vs euro above 91 pence - here Some of the declines in the British currency have been attributed to worries around Britain's break with the EU.
“The performance of the pound in recent weeks suggests Brexit risks are starting to play a role,” said Derek Halpenny, head of research at MUFG.
Brexit has taken a back-seat during the pandemic, but with a transition period set to expire at year-end, the clock is ticking for Britain to reach a trade deal with the bloc.
London wants free trade but is prepared for no deal, Transport Secretary Grant Shapps said on Wednesday.
That followed a report in the Daily Telegraph that suggested the two sides may fail to agree, with only a few days left before Prime Minister Boris Johnson’s July deadline.
The Financial Times reported that the British government has also abandoned hopes of clinching a U.S. free trade deal ahead of November’s presidential election there, with officials blaming the novel coronavirus outbreak for slow progress.
Reporting by Olga Cotaga; Editing by Catherine Evans and Hugh Lawson