The pound was on track for its biggest two-day fall in nearly two years on Wednesday as concerns rose that the United Kingdom could still crash out of the European Union without a trade deal in place at the end of a transition period in December 2020.
Prime Minister Boris Johnson’s government on Tuesday ruled out an extension to the December 2020 deadline for negotiations on a trade deal with the EU, creating a new Brexit cliff edge and cutting short sterling’s post-election rally.
“Johnson’s plans highly increase the chances that the UK stumbles out of the EU without a trade agreement given the short timeline for official negotiations,” Scotiabank analysts said.
Investment bank JPMorgan sees an “uncomfortably high” 25 percent chance of a no-deal Brexit.
The pound tumbled 0.5 percent on Wednesday to $1.3070, after falling 1.5 percent on Tuesday, taking losses over the last two days to nearly two percent for its biggest losing streak since February 2018.
It is now nearly 3.4 percent below the 18-month high above $1.3516 struck after Johnson’s landslide victory in last Thursday’s general election.
Against the euro it was down around 0.2 percent at 85.07 pence.
“This is a correction of the election euphoria, slowly but surely, as the realisation sets in that this whole Brexit drama is not over yet and just another deadline of a hard Brexit will be looming eventually at the end of the year,” said Thu Lan Nguyen, FX strategist at Commerzbank. She said Brexit had come back onto the agenda more quickly than she had expected.
Johnson’s withdrawal bill will be debated on Friday in parliament, where he now has a majority.
Nguyen put an 80 percent probability on the UK outlawing an extension.
Nguyen said it was too early to assess the renewed risk of a hard Brexit, but the fact that Johnson missed his October 31 “do or die” deadline for exiting the EU suggests that this December 2020 deadline could also be extended.
This means Brexit will still be in focus at the meeting of the Bank of England [BoE] on Thursday.
“At least temporarily the market surely will be looking at the BoE, to get an idea of how to assess this Brexit risk – they have to make a statement about this as well,” Nguyen said.
BoE Governor Mark Carney warned on Tuesday that monetary policy tools risk becoming ineffective unless there is better cooperation from governments on trade and fiscal policy.
Money markets are pricing in about a 60 percent probability of a quarter-point interest rate cut by next October – slightly higher than the around 40 percent just after the election result was announced last Friday.
“Recent economic data releases from the UK suggest that the BoE will maintain a cautious stance tomorrow despite some grounds for optimism following the election,” Mitsubishi UFJ Financial Group analysts wrote in a note to clients.