LONDON (Reuters) - Sterling steadied near 11-month lows on Thursday after a decline this week that was fueled by investor fears Britain will leave the European Union without an agreement on its future relationship with the bloc.
The pound traded as low as $1.2842, its weakest since Aug. 25 2017, before climbing back up to around $1.29. It is now set for its biggest weekly loss since May.
The pound rose against the euro, gaining 0.2 percent to 89.980 pence EURGBP=D3, up from 10-month lows touched on Wednesday.
The recent slide began after the UK trade minister, Liam Fox, warned over the weekend that he saw a 60 percent chance of a no-deal Brexit.
Most analysts believe Britain and the EU will strike a deal, but doubts are growing. The UK is staring at a few crucial months of negotiations in which it must make progress if it is to agree a deal before its scheduled exit date in March 2019.
“The risk is that this gets its own dynamic and we see a downward spiral in the pound,” said Commerzbank analyst Thu Lan Nguyen, predicting at least a 10 percent drop in sterling with a no-deal Brexit. “This is a warning sign.”
Economists give a median 25 percent chance of no agreement, according to a Reuters poll published on Thursday. Foreign exchange strategists believe sterling/dollar will rise to $1.31 in a month and to $1.34 by end-January. Without a deal, however, sterling would slide to $1.20.
Traders say investors have rushed to hedge themselves against Britain’s being locked out of trading freely with its largest export partner, the EU.
The cost of protecting against price falls has risen, and three-month sterling volatility this week rocketed to a five-month high.
Some, however, believe markets have priced in the cost of a no-deal Brexit.
“When it comes to bonds and currencies, we think that most of the hard Brexit risk has been priced in,” said Kallum Pickering, a senior economist at Berenberg.
“The reason I say that hard Brexit is priced in is that since the Brexit vote, we had the correction in sterling , and the UK economy did better than expected ... The BoE (Bank of England) has gone from an easing policy stance to a tightening policy stance.”
Nordea analyst Andreas Steno Larsen said he was looking at pound buying opportunities because the “Bank of England seems to have a very low tolerance of a weaker pound”, given the inflationary impact of a weaker currency.
The pound continued its fall against the Swiss franc GBPCHF=D3 on Thursday but recovered slightly versus the Japanese yen GBPJPY=.
Reporting by Tommy Wilkes, additional reporting by Dhara Ranasinghe and Virginia Furness, editing by Larry King