Sterling tumbles on no-deal Brexit fears

Sterling took a tumble on Tuesday amid news that Prime Minister Boris Johnson plans to add a clause to the Brexit bill making it illegal to extend the transition period beyond the end of next year, reviving the threat of a no-deal Brexit.

At 0840 GMT, the pound was down 1.2% against the dollar at 1.3168 and 1.1% lower versus the euro at 1.1829, extending overnight losses and erasing its post-election gains following a report that Johnson wants to enshrine into law the end of December 2020 leaving date, meaning that negotiators would have only 11 months to reach a deal to leave the EU.

As it stands, the transition period can be extended once by up to two years if the UK and EU both decide to do so before 1 July 2020.

The pound had hit a one-and-a-half-year high of $1.3516 on Friday on the back of the Tories’ landslide election win. Against the euro, sterling recorded a three-year high in the aftermath of the election result last week.

"Currency traders don’t know how to square the circle of a comprehensive EU-UK free trade deal and an end of 2020 deadline to complete it," said London Capital Group analyst Jasper Lawler.

Oanda analyst Craig Erlam said: "Anyone hoping that the election would draw a line under Brexit was sadly mistaken. The next 12 months is going to be another series of painful negotiations during which the risk of a WTO Brexit is regularly and fiercely debated, both in the Commons and the news.

"It's not over yet and sterling traders are starting to fret a little, once again. Nothing in ever as straight forward as we hope. But perhaps urgency isn't a bad thing, the last thing anyone wants is for this to drag on for years and years."

Neil Wilson, chief market analyst at Markets.com, said: "Sterling tripped over its heels as Boris Johnson is looking to legislate for Britain to leave the EU fully in Dec 2020 with or without a trade deal. That means no possible way to extend the transition period.

"I must confess to believing he wouldn’t need to be so drastic, that a large majority offered the flexibility yet strength a government craves in deal making. This sets up another cliff-edge and could create yet more months of uncertainty for investors just when we thought all was squared away."

Chris Beauchamp, senior market analyst at IG, said that although sterling has unwound all of the gains made on election night, "looking beyond some of the hyperbole this morning it is still on the up, having gained 10% versus the dollar since the 3 September low".