Sterling slides as no-deal Brexit fears build

LONDON: Sterling skidded lower on Friday and implied volatility surged as markets increasingly priced the risk of Britain crashing out of the European Union at the end of the month with no trading arrangements in place.

Prime Minister Boris Johnson said on Thursday he was trying to secure a trade deal but there was "a strong possibility" Britain and the EU would fail to agree.

The pound fell as much as 0.8pc against the dollar to a low of $1.3184 before recovering somewhat. It lost 0.6pc to the euro at 91.92 pence -- a 2-1/2 month low.

Jitters were clear on derivatives markets too where implied volatility, an options market gauge of expected price swings, rose further. One-week and overnight volatility rose above 20pc to the highest levels in more than eight months.

UK bank shares also tumbled as no-deal fears spread through financial markets, with Barclays and Natwest down more than 4pc and Lloyds more than 3pc.

Thu Lan Nguyen, an analyst at Commerzbank, said the market may "price in a no-deal in the next few days", averting a serious crash in the exchange rate when the deadline for the trade talks expires.

"But it is also possible that the market will hold on to the hope of a last-second agreement and then be surprised by a no-deal, which would lead to major market turbulence," she said.

While banks and bookmakers have slashed the chances of Britain reaching a deal, many investors believe a last-minute deal will be reached and the moves downwards in sterling have not been as sizeable as earlier Brexit deadlines approached.

Some analysts say the market looks complacent.

Elsa Lignos, Global Head of FX Strategy, at RBC Capital Markets, says that while the odds of a trade deal being reached in 2020 have nearly halved since early December, a basket of sterling versus the dollar and euro is down only around 1pc.

She said Brexit fatigue, expectations that the political drama is all part of a "set-up for a 'Christmas miracle'" and the view among some that a no-deal Brexit would not be terrible all explained the relative calm in the pound.

"The GBP vol curve is reflecting the uncertainty, having comfortably inverted, but spot GBP feels complacent. Perhaps we are wrong, and makeshift agreements will tide us over," she said.