The British pound fell to $ 1.3161 in early Monday afternoon, losing 0.91% against the dollar after the Financial Times announced the UK government was planning legislation that would replace key parts of the withdrawal agreement. The currency also fell 0.8 percent against the euro.
The losses come after the currency’s strong performance over the summer, when traders largely ignored Brexit-related headlines and applauded the pound’s move higher against the ailing dollar. The pound has gained about 4 percent against the dollar since June.
But the pound was rocked by the UK’s threat to jeopardize trade talks, prompting expectations of exchange rate volatility to rise for the rest of the year. The eighth official round of talks between the two sides begins on Tuesday.
“The Brexit heat is back and the pound sterling is, in our opinion, unprepared,” said Petr Krpata, currency strategist at ING Bank in London.
British Prime Minister Boris Johnson said on Monday that if a withdrawal agreement was not reached with the EU by October 15, the two sides would have to “move on”.
Until recently, derivatives markets hinted that traders weren’t concerned about the looming December 31 deadline, when a standstill agreement expires and the UK leaves the single market and the EU customs union.
But the price of contracts that pay if the pound’s exchange rate becomes more volatile surged on Monday, with the three-month contract hitting its highest since late May.
Options markets have been reminded of the risk of the UK leaving without a trade deal, said Paul Robson, head of foreign exchange strategy at NatWest Markets. He added that the markets still expected a “relatively limited” deal between the two sides.
“There is little talk of a ‘no deal’ outcome, but I think most people realize that the chances of that happening are not zero,” he added.
ING’s Mr Krpata expects the euro to rise to £ 0.91 from around £ 0.899 this month and rise further, possibly reaching parity, if both sides fail to a trade agreement.
Seema Shah, portfolio manager at Principal Global Investors, said the weekend headlines were “a timely reminder that while markets have been distracted by the UK’s struggle to rejuvenate its economy, Brexit negotiations quietly lead nowhere ”.
She said in the coming weeks, forex traders would likely focus on the risks of a no-deal scenario, “punctuated by intervals of optimism about the success of Johnson’s hardball strategy.”