LONDON: Sterling fell on Monday to a 12-day low against the US dollar and the euro as Brexit talks veered into fresh crisis after Britain threatened to undermine its European Union divorce deal.
Britain was reportedly planning new legislation to override parts of the Brexit Withdrawal Agreement it signed in January, which could potentially jeopardise the whole treaty and create frictions in British-ruled Northern Ireland.
The currency was last down 0.8% at $1.3175, after falling earlier in the session by more than 1% to $1.3139, its lowest level since Aug. 26.
Against the euro, the British pound touched a low of 89.94 pence, reaching the same Aug. 26 milestone, and was last trading down 0.7% at 89.80 pence.
Leveraged funds were slightly long on the British currency, latest Commodity Futures Trading Commission data showed, suggesting traders could push the currency down even further if those longs were to be unwound.
Implied volatility gauges spiked in nearly all maturities, with six-month options contracts - which incorporate the end of the transition period - hitting their highest cost since July 2 at 9.7%. Three-month vols rose to 9.9%, their highest since the end of May and one-month vols also picked up to their highest since end-June.
Sterling had enjoyed weeks of rallies as the dollar weakened and investors stayed on the sidelines, but as traders return from their summer holidays and the deadline for a post-Brexit trade deal looms, the UK currency is looking more vulnerable.
Britain and its biggest trading partner are resuming a fresh round of Brexit negotiations this week after failing to make any progress during the last one a couple of weeks back. The EU has said it will not let the UK enjoy free access to its markets without obeying the bloc's rules, while Britain stands firm on issues of sovereignty.
Britain formally left the EU in January but is currently trading on the same terms as before its exit during a transition period that runs to the end of this year. London and Brussels have both said October is the deadline for clinching a deal on post-Brexit trading arrangements.
As time slowly runs out, any negative Brexit-related headline prompts traders to sell the pound, already beset by woes such as a deep recession from the coronavirus crisis and an above 100% debt-to-GDP ratio.