LONDON (Reuters) - Sterling hit two week lows on Thursday after giving up all its post-election gains on fears that Britain may still leave the European Union without a trade deal at the end of next year.
Market optimism following the Conservative Party’s decisive win in last week’s general election has waned after Prime Minister Boris Johnson set a hard deadline of December 2020 to agree a trade deal with the EU, risking another no-deal Brexit cliff-edge if an agreement isn’t reached.
The Bank of England kept interest rates on hold on Thursday, saying it was too soon to gauge whether Johnson’s election victory would lift the Brexit uncertainty that has hung over the economy.
Prompted by fears the country’s job market is deteriorating, two of the BoE’s nine policymakers voted to cut borrowing costs for a second month in a row.
The pound fell following the meeting, touching a two-week low below $1.30 and was last down 0.5% at $1.3025, far below the $1.35 peak hit following last Thursday’s election. Against the euro it was last down 0.5% to 85.39 pence.
Citing ongoing Brexit risks and bleak global growth, Commerzbank FX strategist Ulrich Leuchtmann said markets seemed to believe that the bank would have “to ease it’s monetary policy anyway in 2020 and perhaps even relatively early in 2020”.
Implied volatility gauges for long-term maturities have risen slightly, but are still around their lowest this year, suggesting investors were not hurrying to protect themselves against unexpected swings in the currency.
“If political uncertainty does increase in the UK, both business and consumer confidence can be expected to be impacted,” said Jane Foley, senior currency strategist at Rabobank.
“Consequently, the market is likely to conclude that the probability of a dovish Bank of England in 2020 will also increase,” Foley said.
European leaders said during an EU Summit last week it would be challenging to agree on a post-Brexit trade deal by the end of 2020.
Canadian bank BMO assigns a 35% probability of a hard Brexit, while Nordea analysts see the chances at 20%.
Fears of a disorderly exit have seen some big banks like Deutsche Bank turn negative on sterling as they do not see the approach of writing a deadline into the Withdrawal Agreement putting pressure on Brussels to come to a quick agreement.
Others have remained positive on the pound.
“Exchange-rate drops into the lower end of the sterling/dollar $1.30–$1.40 range can be used to build exposure,” said Mark Haefele, Chief Investment Officer at UBS Global Wealth Management.
“Fading dollar demand and a clear path toward a benign free trade agreement with the EU could see sterling rallying to $1.45 by end-2020,” he said.
Reporting by Olga Cotaga and Yoruk Bahceli; Additional reporting Tommy Reggiori Wilkes; Editing by Robert Birsel, Kirsten Donovan