The pound fell on Thursday, hitting a more than five-week low versus the euro, as Britain confirmed a hardline stance on trade talks with the EU and disappointment grew that the new finance minister may not increase spending as much as expected.
Britain said on Thursday it wanted binding obligations on access to the European Union's financial market. London, Europe's biggest financial centre, risks being locked out of its biggest market for services such as banking, insurance and asset management if it loses access to the EU in January.
But senior minister Michael Gove told parliament on Thursday the UK would not "trade away its sovereignty" in pursuit of a trade deal with the EU.
The pound slipped 0.2% to a one-week low of $1.2860 and held near this level in late trade.
Against a broadly firm euro, sterling fell more than 1% to 85.43 pence, its lowest level in more than a month.
The pound also fell against the safe-haven Japanese yen to a two-month low of 141.50.
"The pound has reversed early gains as the government firmly places the prospect of no-deal back on the table in order to strong-arm the EU's dynamic alignment to bend to their will," said Simon Harvey, a forex analyst at broker Monex Europe.
"The resumption of trade uncertainty comes just as business optimism starts to improve, suggesting the Brexit headwind to the economy may not have abated quite just yet and hence the need for heightened fiscal stimulus," Harvey said.
But the new fiance minister, Rishi Sunak, has been told by Treasury officials he cannot simultaneously raise public spending as fast as Prime Minister Boris Johnson wants, keep taxes down and adhere to new Treasury rules that allow borrowing only for capital investment, the Financial Times reported.
Consequently, Sunak could postpone loosening fiscal policy, which has put pressure on the pound. The possibility of more spending was the main reason the pound strengthened in recent weeks, despite concern that Britain may not agree a trade deal with the EU by the end of this year.
Market gauges for implied volatility in sterling in all tenures from one-month to one-year options contracts all rose close to their highest levels this year.
Money markets have started to price in a higher chance the Bank of England will cut interest rates to boost the economy if data worsen and Sunak does not stimulate growth through higher fiscal spending. A 25-basis-point cut to the current 0.75% rate is priced in by August this year.
"No big fiscal push means that if there's a slump, the burden of reviving the economy will fall on monetary policy," said Marshall Gittler, an analyst at broker BDSwiss Group.
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