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UPDATE 3-Pound sinks 1% vs dollar on threat to Brexit divorce deal

Mon, 7th Sep 2020 09:35

(Updates prices and adds context)

By Olga Cotaga

Sept 7 (Reuters) - Sterling fell on Monday to a 12-day low
against the U.S. dollar and the euro as Brexit talks veered into
fresh crisis after Britain threatened to undermine its European
Union divorce deal.

Britain was reportedly planning new legislation to override
parts of the Brexit Withdrawal Agreement it signed in January,
which could potentially jeopardise the whole treaty and create
frictions in British-ruled Northern Ireland.

The currency was last down 0.8% at $1.3175, after falling
earlier in the session by more than 1% to $1.3139, its lowest
level since Aug. 26.

Against the euro, the British pound touched a low of 89.94
pence, reaching the same Aug. 26 milestone, and was last trading
down 0.7% at 89.80 pence .

Leveraged funds were slightly long on the British currency,
latest Commodity Futures Trading Commission data showed,
suggesting traders could push the currency down even further if
those longs were to be unwound.

Implied volatility gauges spiked in nearly all maturities,
with six-month options contracts - which incorporate the end of
the transition period - hitting their highest cost since July 2
at 9.7%. Three-month vols rose to 9.9%, their
highest since the end of May and one-month vols also picked up
to their highest since end-June .

Sterling had enjoyed weeks of rallies as the dollar weakened
and investors stayed on the sidelines, but as traders return
from their summer holidays and the deadline for a post-Brexit
trade deal looms, the UK currency is looking more vulnerable.

CHALLENGES AHEAD

Britain and its biggest trading partner are resuming a fresh
round of Brexit negotiations this week after failing to make any
progress during the last one a couple of weeks back. The EU has
said it will not let the UK enjoy free access to its markets
without obeying the bloc's rules, while Britain stands firm on
issues of sovereignty.

Britain formally left the EU in January but is currently
trading on the same terms as before its exit during a transition
period that runs to the end of this year. London and Brussels
have both said October is the deadline for clinching a deal on
post-Brexit trading arrangements.

As time slowly runs out, any negative Brexit-related
headline prompts traders to sell the pound, already beset by
woes such as a deep recession from the coronavirus crisis and an
above 100% debt-to-GDP ratio.

Another scare is how the British labour market is going to
perform once the government's furlough scheme runs out at the
end of this month. No extensions are expected and analysts say
this could trigger massive waves of unemployment.

British finance minister Rishi Sunak's decision to scrap a
tax on house sales - known as Stamp Duty - up to a certain
amount until March next year has helped trigger a mini rally in
the housing market.

Prices jumped by the most since 2016 in August to hit a
record high, mortgage lender Halifax said on Monday, mirroring a
report last week from Nationwide, a mortgage provider.

Monday's news on Brexit "is just the cherry on top of the
cake" for the beleaguered UK currency, said Jordan Rochester,
currency analyst at Nomura.

"We've had weeks of pretty negative stories about the UK
doubling its fishing quota, which would not be agreed to by the
EU. We've got the state aid regimes still not being laid out as
well by the UK side. So I think sterling is going to
underperform here," he said.

Rochester expects the British pound to continue falling
against the euro in coming weeks ahead of an EU summit due in
mid-October, forecasting the pound to trade around 92 pence
going into the meeting.

"And if we do get an actual announcement of no deal, prepare
for a hard Brexit, the pound should continue to weaken, we're
talking something like 95 to 98 pence against the euro."

(Reporting by Olga Cotaga;
Editing by Andrew Cawthorne and Gareth Jones)

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