* Pound drops sharply vs euro and dollar
* UK bank shares also tumble as no-deal risks rise
* Some analysts say FX market looks complacent
(Adds details, latest prices)
By Tommy Wilkes
LONDON, Dec 11 (Reuters) - Sterling skidded lower on Friday
and implied volatility surged as markets increasingly priced the
risk of Britain breaking away from the European Union at the end
of the month without a trade agreement.
Prime Minister Boris Johnson said on Thursday he was trying
to secure a deal but there was "a strong possibility" Britain
and the EU would fail to agree. Current arrangements will end on
Dec. 31 when Britain's Brexit transition period
finishes.
The British currency fell as much as 0.9% against the dollar
to a low of $1.3175, its weakest since Nov. 16.
Friday's fall puts the pound on course for a 1.8% drop this
week, the worst performance since September.
It lost 0.6% against the euro to stand at 92 pence, a 2-1/2
month low.
Jitters were clear on derivatives markets too where implied
volatility, an options market gauge of expected price swings,
rose. One-week and overnight volatility climbed above 20% to
more than eight month highs.
UK bank shares also tumbled as no-deal fears spread, with
Barclays, Lloyds and Natwest down more than 4%.
The FTSE 250 would slide between 6%-10% and UK bank
shares would drop between 10% and 20% in a no-deal Brexit
scenario, Morgan Stanley strategists said in a note to clients
on Friday.
Thu Lan Nguyen, a currency analyst at Commerzbank, said the
market may "price in a no-deal in the next few days", averting a
serious crash in the pound when the deadline for the trade talks
expires.
"But it is also possible that the market will hold on to the
hope of a last-second agreement and then be surprised by a
no-deal, which would lead to major market turbulence," she said.
While banks and bookmakers have slashed the chances of a
deal, many investors believe London and Brussels will reach a
last-minute agreement and the drops in sterling have not been as
sizeable as in the run-up to earlier Brexit deadlines.
Some analysts say the market looks complacent.
RBC Capital Markets' Global Head of FX Strategy, Elsa
Lignos, said that while the odds of a trade deal being reached
in 2020 had nearly halved since early December, a basket of
sterling versus the dollar and euro was only down around 1%.
She said Brexit fatigue, expectations that the political
drama is all part of a "set-up for a 'Christmas miracle'" and
the view among some that a no-deal Brexit would not be terrible
explained why sterling had not fallen further.
"The GBP vol curve is reflecting the uncertainty,
having comfortably inverted, but spot GBP feels complacent.
Perhaps we are wrong, and makeshift agreements will tide us
over," she said.
(Additional reporting by Sujata Rao
Editing by Timothy Heritage, Kirsten Donovan)