Sterling was falling on Friday, retreating from the one-year high it reached the day before, on growing scepticism that Britain will be able to clinch a post-Brexit trade deal with the European Union by the end of this month.
The EU is still negotiating a trade deal with Britain, European Council President Charles Michel said on Friday morning.
The next event to eye is the European Council meeting on Dec. 10, with many self-imposed deadlines broken and issues such as fisheries and level playing field still hanging.
“It’s conceivable that they don’t come to any agreement before the transition period ends on Jan. 1 and continue negotiating some sort of trade deal even after the UK has crashed out with no deal,” said Marshall Gittler, head of investment research at BDSwiss Group.
“I expect sterling to remain volatile indefinitely,” Gittler said.
The British pound climbed to a one-year high near $1.35 on Thursday as a U.S. dollar selloff gathered momentum. One more hurdle for the currency is a piece of legislation that breaks Britain’s Brexit withdrawal treaty, expected to be debated in parliament next week.
Britain’s upper house of parliament voted last month to remove clauses in the Internal Market Bill which broke international law, but the government intends to reinstate them in the lower chamber on Monday.
That would complicate negotiations with Brussels, which has protested intensely against it.
The pound was last trading down 0.2% at $1.3424 and falling by 0.4% against the euro at 90.65 pence.
Traders’ nervousness was also reflected in the derivatives market, as one-week implied volatility gauges - derived from the cost of options and incorporating risk posed by next week’s European Council event - rose to their highest since March at 13.5%. Two-week vols hit similar levels.
Reporting by Olga Cotaga; Editing by Simon Cameron-Moore