The pound sank to an 11-month low on Monday as comments by officials about Brexit stoked fears among currency investors that Britain could soon crash out of the European Union without securing a trade agreement.
With less than eight months until Britain quits the EU, the government has yet to agree a divorce deal with Brussels.
The saga over Brexit has come to dictate the pound’s fortunes as fears mount about the impact it would have on Britain’s trade.
Investors are growing edgy about the currency’s outlook despite signs the economy is improving somewhat and the Bank of England raising interest rates last week for the second time in only a decade.
British trade minister Liam Fox, a prominent Brexit supporter in Prime Minister Theresa May’s cabinet, said over the weekend the odds of Britain leaving the EU without agreeing on a deal stood at 60-40.
“The voices forecasting a hard Brexit are becoming increasingly shrill. The FX market is slowly beginning to work out that these people might successfully torpedo a constructive solution,” said Commerzbank currency strategist Ulrich Leuchtmann, in Frankfurt.
Sterling on Monday fell to $1.2954, its lowest since July 19, down 0.3 percent on the day. It also fell 0.2 percent against the euro to 89.20 pence and was the biggest loser against the greenback among major currencies in early London trading. Speculators’ net short pound positioning slid to its highest level in 10 months, according to calculations by Reuters.
If Britain fails to agree the terms of its divorce with the EU and leaves without a transition agreement, it would revert to trading under World Trade Organization rules.
Most economists think that would cause serious harm to the world’s fifth largest economy as trade with the EU, Britain’s biggest market, would become subject to tariffs.
Supporters of Brexit say there may be some short-term pain for Britain’s $2.9 trillion economy, but that long-term it will prosper when cut free from the EU.
On Friday, Bank of England Governor Mark Carney said the chances of a no-deal Brexit had become “uncomfortably high”.