Around Friday’s European session, the pound continued its downward spiral against the dollar, falling nearly 140 points and breaking below the 1.32 handle for the first time since November 19, down 0.7% during the day.
Time came before the U.S. session, the pound still tumbled. As of press time, the pound fell more than 1% against the dollar during the day and is now at 1.3138.
The GBPUSD 1-month risk reversal indicator shows the degree of bearishness on the pound is the largest since March 2020, suggesting that the pound will fall further. And earlier today, sterling implied volatility has risen further on the risk of a no-deal Brexit, with the one-period contract rising more than 20% to an eight-and-a-half-month high.
In terms of news, the outlook is not promising, with EU member states showing a lackadaisical approach to the issue of a Brexit trade deal at the EU summit, which has led to a rise in the risk of a no-deal Brexit. Agencies forecast a 61% chance of a no-deal Brexit for the U.K., up from 53% last Thursday.
On Friday evening BST, British Prime Minister Johnson said that from the current position, it is likely that the UK and the EU will not reach a Brexit deal. And according to Sky News, Prime Minister Johnson admitted that it is “very, very likely that the two sides will not reach a deal.
A spokesman for Prime Minister Johnson noted that the U.K. is looking at the EU’s no-deal plan and that both sides are interested in maintaining vital connectivity. In addition, the Prime Minister’s spokesman stressed that the UK, as an independent maritime nation, is prepared to conduct annual negotiations on fisheries in 2021.
According to Italian news agency Ansa, European Commission President von der Leyen said at the EU summit that a no-deal Brexit is the most likely option. At the EU summit, EU leaders spent less than 10 minutes talking about the Brexit trade deal.
The two-day EU summit lasted from evening to morning, but there was still no discussion of Britain’s exit from the EU. Leaders will get an update after British Prime Minister Johnson meets with European Commission President von der Leyen. The climate negotiations are the reason for this delay.
In a way, this is a message to the UK that they have other more “important” issues to address than the ongoing concessions on Brexit trade talks. Before yesterday’s summit, Britain’s exit from the EU was supposed to be discussed first, but European Commission President von der Leyen intervened and set it aside until other matters were resolved.
EU officials say the situation in the Brexit negotiations is difficult. Major obstacles remain. The probability of not reaching a deal is higher than the probability of reaching one, and negotiations resume today, and we won’t see if a Brexit trade deal is possible until Sunday.
Judging from the overall tone of the British and European sides in the last few days, a no-deal Brexit is highly likely. Both the UK and the EU have warned that a Brexit deal may not be reached.
On the British side, Johnson’s latest statement said it is “highly likely” that the UK will not be able to reach a trade deal with the EU after the end of the Brexit transition period. He said that although negotiations with the EU are still ongoing, “now is the time” for businesses and people to prepare for this outcome.
On the EU side, EU chief Brexit negotiator Barnier also said that the possibility of reaching a Brexit trade deal is “very slim”, although the British side has made relatively sincere concessions.
The Bank of England also gave the market another “precautionary” shot, the Bank of England Deputy Governor Cunliffe said on Friday.
“It is not news to the Bank of England’s Financial Policy Committee that there is no Brexit trade deal, and our job has always been to prepare for the worst possible outcome.”
It is worth noting that the UK and Europe have now set Sunday as a key deadline for negotiations, so any trader planning to hold a position in the pound over the weekend is tantamount to taking a big gamble.
Thu Lan Nguyen, FX strategist at Commerzbank, noted that the probability of a deal remains highly uncertain and the market is unlikely to fully reflect the likelihood of a deal or no deal. The market may take some time to assess the outcome for better or worse, so the pound may see more volatility next.
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