Sterling falls as investors get jittery over Brexit

LONDON: The British pound fell 1pc to 2-1/2 week lows on Monday as investors became more fearful about the chance of a Britain and the European Union failing to agree on a Brexit deal as last-ditch talks resumed in Brussels.

The sharp drop was a complete U-turn in market sentiment from Friday when sterling rose above $1.35 for the first time this year.

The EU's chief Brexit negotiator, Michel Barnier, was "rather downbeat" about the chance of a deal, a senior EU diplomat said. British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen will review the situation on Monday evening. nL1N2IL05M]

The pound was steady overnight but started to fall in early London trading, dropping sharply not long after 0800 GMT when The Sun newspaper reported that Johnson was ready to pull out of Brexit talks "within hours" unless the European Union changes its demands.

At 0836 GMT, the pound was down 1.2pc versus the dollar, at $1.328.

Versus the euro, it was down around 0.9pc at 91.06 pence - its weakest in more than six weeks.

"Markets are increasingly jittery to bad news having been willing to look through much of the negative headlines last week," said John Goldie, FX dealer at Argentex.

"The suggestion that we are "hours" away from pulling out of discussions has had the inevitable impact on the rates but I'd wager "hours" will pass this morning without the fulfilment of the ultimatum," he said.

"No party involved wants to be seen to be the first to concede and, actually, all the recent theatrics are indicative of the fact that the end is in sight and while both sides remain at the table I suspect a deal of sorts remains the clear favourite outcome," he added.

Sterling implied volatility gauges with overnight and one-week maturities jumped to their highest since March, indicating that traders are bracing for future price swings.

Risk reversals - a derivative used to hedge risk - also surged, having more than doubled in the past two weeks.

In recent weeks, sterling traders had been more optimistic about the chance of a deal being struck. CFTC positioning data showed that, in the week to Dec. 2, speculators' cut their net short position on the pound to its lowest in 5 weeks.

"Traders are not expecting no-deal, but hopes for a deal look increasingly compromised," said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.

Analysts said they are now looking to the EU leaders summit on Dec. 10-11 as a possible deadline by which point a deal could be reached.

The UK's draft Internal Market Bill - which would undercut bits of the Brexit divorce settlement - is due back before the parliament late on Monday.