LONDON (Reuters) - Sterling largely brushed off the British Prime Minister’s announcement that it was time to prepare for a no-trade deal Brexit on Friday, as analysts said the majority of market participants still expect a deal will be reached.
Markets had been waiting for Boris Johnson to say whether the UK would quit trade talks after the Oct. 14-15 European Union leaders summit, a self-imposed deadline to leave the negotiating table if there was no agreement.
The pound dropped sharply when Johnson said that the UK should get ready for a no-deal outcome, losing as much as a cent or 0.8%, but rebounded as he stopped short of announcing that the UK would walk away from the talks.
“Preparation for a no-deal is a very different statement to an actual no-deal,” said Neil Jones, head of FX sales at Mizuho.
“The initial market reflex action was to pound on elevated chances of a no-deal. However, the majority of participants do expect a deal of some form to emerge, despite the recent headlines,” he said.
Johnson’s spokesman later said that trade talks are over, effectively ended by the EU not changing their negotiating position.
The EU’s most powerful leaders rushed to say that they wanted a trade deal and that talks would continue, though not at any price.
By 1421 GMT, the pound was up 0.2% on the day at $1.2920, but set to end the week 1% lower.
Versus the euro, it was broadly flat on the day at 90.78 pence.
Kit Juckes, head of FX strategy at Societe Generale said most people still expected a last-minute deal to be reached, but that that view will be reconsidered as the Dec. 31 deadline gets closer.
“Euro-sterling is still under 0.91 – sterling’s not in free-fall here by any stretch of the imagination,” he said.
The possibility of negative rates also presents a downside risk to sterling, with analysts saying the Bank of England is more likely to cut rates below zero if there is an economically-damaging no-deal after the Brexit transition period ends on Dec. 31.
The UK has been putting more of the country under stricter lockdown measures this week in a bid to contain a second wave of COVID-19, adding to worries about the economic fallout from the pandemic.
Reporting by Elizabeth Howcroft; Editing by Kirsten Donovan
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