LONDON (Reuters) - The pound was on track for its biggest two-day fall in nearly two years on Wednesday as concerns rose that Britain could still crash out of the European Union without a trade deal in place at the end of a transition period in Dec. 2020.
Prime Minister Boris Johnson’s government on Tuesday ruled out an extension to the December 2020 deadline for negotiations on a trade deal with the European Union, creating a new Brexit cliff-edge and cutting short sterling’s post-election rally..
“Johnson’s plans highly increase the chances that the UK stumbles out of the EU without a trade agreement given the short timeline for official negotiations,” Scotiabank analysts said.
Investment bank JPMorgan sees an “uncomfortably high” 25% chance of a no-deal Brexit.
The pound tumbled 0.5% on Wednesday to $1.3070, after falling 1.5% on Tuesday, taking losses over the last two days to nearly 2% for its biggest losing streak since February 2018.
It is now nearly 3.4% below the 18-month high above $1.3516 struck after Johnson’s landslide victory in last Thursday’s general election.
Against the euro it was down around 0.2% at 85.07 pence EURGBP=D3.
“This is a correction of the election euphoria, slowly but surely, as the realisation sets in that this whole Brexit drama is not over yet and just another deadline of a hard Brexit will be looming eventually at the end of the year,” said Thu Lan Nguyen, FX strategist at Commerzbank.
She said Brexit had come back onto the agenda more quickly than she had expected.
Johnson’s Withdrawal Bill is due to be debated in parliament, where he now has a majority, on Friday. Nguyen put an 80% probability on the chances of the plan to outlaw an extension to the negotiating period passing.
Nguyen said it was too early to assess the renewed risk of a hard Brexit, but the fact that Johnson missed his Oct. 31 “do or die” deadline for exiting the EU suggests that this Dec. 2020 deadline could also be extended.
This means Brexit will still be in focus at the Bank of England’s meeting on Thursday.
“At least temporarily the market surely will be looking at the BoE, to get an idea of how to assess this Brexit risk — they have to make a statement about this as well,” Nguyen said.
BoE Governor Mark Carney warned on Tuesday that monetary policy tools risk becoming ineffective unless there is better cooperation from governments on trade and fiscal policy.
Money markets are pricing in about a 60% probability of a quarter point interest rate cut by next October, slightly higher than the around 40% just after the election result was announced last Friday.
“Recent economic data releases from the UK suggest that the BoE will maintain a cautious stance tomorrow despite some grounds for optimism following the election,” MUFG analysts wrote in a note to clients.
Graphic - GBP changes: here
Reporting by Elizabeth Howcroft; Additional reporting by Saikat Chatterjee; Editing by Catherine Evans, Kirsten Donovan