With both the European Union and UK claiming a lot more work needs to be done if a Brexit agreement is to be reached by the Halloween deadline, the pound dropped by more than 1 percent against the US dollar, skirting a low of $ 1.251. Markets priced in a lower chance the UK might reach an agreement with the EU after diplomats warned that the EU requires further concessions from Prime Minister Boris Johnson, and described a full agreement by the end of the week as “unlikely”.
Commenting on this, BNY Mellon senior currency strategist, Neil Mellor said: “Don’t take a Brexit deal for granted and the bigger risk here is what concessions will be made from either side.”
Meanwhile, the US dollar rose against the pound as the world’s two largest superpowers, America and China, agreed upon the first phase of a trade deal.
US President Donald Trump said phase one of the trade deal was “very substantial”, but analysts were sceptical, describing the agreement as a “temporary truce” with the more substantive issues yet to be ironed out. Subsequently, risk-appetite waned and buoyed safe-haven currencies like the US dollar.
Head of Economics and Strategy at Mizuho, Vishnu Varathan said: “In terms of the real thorny issues, none of that is thrashed out.
“So the ‘substantial’ is for the low hanging fruits – it’s a bit lower than the low hanging fruits actually. And we haven’t seen anything of real material yet.”
Mr Varathan also noted that China wanted to purchase more US goods, and that the country’s “harder stance, and hunkering down on its position hasn’t really changed either”.
On Monday, US Treasury Secretary, Steven Mnuchin said that if a US-China trade deal fails to emerge by December, an additional round of tariffs is likely to be imposed. This would weigh on risk appetite and could offer some support to the US dollar.
Speaking to CNBC, Mr Mnuchin said: “I have every expectation – if there’s not a deal, those tariffs would go in place – but I expect we’ll have a deal.”
Looking ahead to Tuesday, the pound is likely to edge up on the strength of August’s unemployment rate and wage growth data. While unemployment is expected to dip, wage growth is forecast to rise, with both results offering an upswing of support for Sterling.