The pound has been one of the worst-performing G10 currencies overnight amidst a broad-based rebound for the US dollar off recent lows. Brexit talks have yet to yield a breakthrough and a failure is set to down sterling by 5% to 10%, according to Lee Hardman, Currency Analyst at MUFG Bank.
“Pound weakness has been driven in part by reports that some EU countries are insisting that ‘no deal’ is better than a bad deal. According to Politico, senior EU officials and diplomats say that several countries including France, the Netherlands and Spain are worried that the EU’s mission-focused chief negotiator Michel Barnier may be too eager to conclude a deal with the UK and that EU heads of state and government will have to step in to stop an agreement that is worse for the EU than a no-deal scenario. Overall though EU officials would much prefer to reach a trade agreement.”
“A head-to-head meeting between chief Brexit negotiators Michel Barnier and David Frost today has been described as a ‘moment of truth’ by one EU official. If there is thought to have been sufficient progress, the UK team could remain in Brussels over the weekend. Observers still expect a deal early next week or in the first week of December. Market participants are similarly not that concerned over the risk of no-deal Brexit at this point in time.”
“There is likely to be a much larger pound move to the downside if both sides fail to reach a deal (-5% to -10%), while we expect a modest move to the upside for the pound if a deal is finalized (+1% to +4%).”