Sterling falls as EU leaders press for elusive Brexit trade deal

LONDON: Sterling weakened on Thursday as traders worried about the obstacles keeping the European Union and Britain from reaching a Brexit trade deal.

The pound has risen in recent sessions, propelled by a sense that Britain and the EU, whose leaders are meeting on Thursday, will secure a trade deal by December 2020, when Britain's transition period after leaving the EU runs out.

But sterling remains below a 2020 high of nearly $1.35 hit in early September. Many investors reckon that even if a deal is reached, it will be a limited one.

British Prime Minister Boris Johnson had proposed an Oct. 15 deadline to conclude talks for an agreement, but EU leaders meeting on Thursday will agree to extend the talks.

They want concessions on the contentious subjects of fisheries, fair competition and dispute resolution.

"On Brexit, we have seen negotiations with the EU go down to the wire. But the original deadline of 15 October looks difficult and we may see that postponed to end-October/early November. The next few weeks will be crucial," said Justin Onuekwusi, portfolio manager at Legal & General Investment Management.

Johnson has said he is willing to end the transition period without a trade deal, but many in the market have called his bluff.

Although volatility has risen, sterling has not seen the plunges in value that it suffered in 2018 and 2019 before previous Brexit deal deadlines.

"We are positioned neutrally on sterling, but given the negative news flow we might look to take a contrarian view on the currency as any deal would trigger a relief rally," said Onuekwusi.

Goldman Sachs said in a note on Thursday that a thin Brexit trade deal was likely to be struck by early November.

Sterling dropped as much as 0.6% to $1.2934, in part because of investors buying dollars amid a market-wide rush to safety.

The pound had traded as high as $1.3030 in Asian hours. It was down 0.2% versus the euro at 90.48 pence.

The British currency traded as strong as 88.66 pence in early September, then fell as low as 92.90 pence by the middle of the month, after London said it would undercut its earlier divorce treaty with Brussels.

Commerzbank analyst Ulrich Leutchmann said "constant postponement" of deal deadlines seemed plausible, calling Brexit "the unsolvable permanent subject."

"In this scenario sterling remains trapped in a state of suspense, which is roughly marked by the range of 0.85 to 0.95 in euro-sterling," he said.