The pound swung wildly and gave up its gains after Prime Minister Boris Johnson said the UK should prepare for a no-deal Brexit, amid mixed signals from the negotiating process.
Sterling was trading as much as 0.3 per cent higher when Johnson started speaking.
It then dropped, rose slightly, and fell again to last stand roughly flat at $1.291. Sterling was down 0.2 per cent against the euro at €1.099.
“I have concluded that we should get ready for 1 January with arrangements that are more like Australia’s based on simple principles of global free trade,” Johnson said.
An “Australia” arrangement is widely seen as another name for no deal.
Pound traders were receiving mixed messages, however. The Prime Minister did not say Britain would leave the negotiating table.
Reuters reported that the EU is still preparing for more trade talks next week. An EU official said it is a “very good thing that Johnson wants to keep on negotiating”.
Johnson’s dramatic televised clip was the latest installment of the long running trade agreement saga.
The two sides remain deadlocked over fisheries and state aid policy. The UK rocked negotiations last month when it went back on key parts of the withdrawal agreement that relate to Northern Ireland.
However, many commentators still believe the two sides will reach a deal. They point to the withdrawal agreement being signed at the last moment in 2019. It all gives currency traders lots to mull over.
Pound sterling could hit $1.27
Neil Wilson, chief market analyst at trading platform Markets.com, said before Johnson’s statement: “Headline risk remains but I’d anticipate talks going on for several more weeks.
“Boris Johnson is likely to step up the no-deal rhetoric to force the EU’s hand here.” Wilson said that “may drag GBP/USD back to the low end of the range at $1.27”.
Johnson said in his statement: “Unless there is a fundamental change of approach, we’re going to go for the Australia solution. And we should do it with great confidence.”
“It’s becoming clear the EU don’t want to do the type of Canada deal that we originally asked for. It does seem curious that after 45 years of our membership they can offer Canada terms they won’t offer us.”
Yet an EU diplomat told Reuters: “He didn’t say they will leave the negotiating table. So it’s all just rhetoric. He didn’t say they won’t keep on talking. So they will.”