LONDON (Reuters) - Sterling fell sharply on Tuesday, extending losses as fears grew that Britain was preparing to undercut its Brexit divorce treaty and potentially torpedo trade talks with the European Union.
Sterling took another leg lower after the Financial Times reported that the head of the British government’s legal department had quit over the 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.
After several months of rallying against the dollar, the sudden return of fears about a no-deal Brexit have frightened investors and knocked the pound 4 cents lower versus the dollar since the start of the month.
The pound dropped 1% to $1.3040, its weakest since Aug. 13, while it also fell heavily against the euro to a two-week low of 90.40 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.”
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.
“What both sides are trying to do is ensure a free-trade agreement with no tariffs and where the UK can retain access to the single market, and the EU is saying you can have this but you have to give us something that says you’re not going to go and de-regulate and have a competitive advantage.”
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.
Reporting by Maiya Keidan; Editing by Tommy Wilkes and Alex Richardson