Sterling was on the defensive on Wednesday as uncertainty abounds over whether Britain and the European Union will have reached a Brexit deal in time for their self-imposed deadline on Thursday at the EU Summit.
Sterling overnight implied volatility gauges soared to a seven-month high of above 13% indicating investors were prepared for unexpected moves in the British currency in the next hours.
British Prime Minister Boris Johnson and the head of the European Commission, Ursula von der Leyen, will talk about the progress of the Brexit negotiations on Wednesday afternoon.
The two chief negotiators, the EU’s Michel Barnier and Britain’s David Frost, say they are inching towards a deal, though they have underscored that important gaps remain on fishing, level playing field issues and governance.
EU leaders meeting in Brussels on Thursday and Friday to discuss Brexit will say that progress in talks with Britain is “still not sufficient” to seal a new trade deal, according to a draft summit decision seen by Reuters.
The European Union would prefer to have a Brexit deal but is prepared for the eventuality that no agreement can be reached, the Commissioner for the EU’s single market, Thierry Breton, told BFM business radio on Tuesday.
MUFG’s head of research Derek Halpenny said the focus on fisheries, one of the last remaining sticking points in the talks, suggests a final deal was close.
However, any agreement will likely be far removed from what analysts had initially for, limiting the gains for sterling even if a deal is signed.
“We are only arriving at the possibility of a deal due to its being very narrow in scope...There is set to be considerable disruption and frictions on trade that may well still be underestimated by the markets that will likely curtail the period of pound appreciation following a likely deal over the coming weeks,” Halpenny said.
Sterling fell to a one-week low of $1.2865 and was last trading down 0.4% at $1.2883. It also fell to a five-day low of 91.21 pence versus the euro and was last trading hands down 0.3% at 91.08 pence.
Reporting by Olga Cotaga; Editing by Raissa Kasolowsky