Sterling traders are gearing themselves up for another nervy week amid fears that a collapse in Brexit talks could spark a sharp sell-off in the pound.
Negotiations are ongoing, but noises from both camps suggest they remain stuck on fishing rights and competition policy.
British health secretary Matt Hancock this morning told Sky News that the European Union was making “unreasonable” demands.
France appears to be taking a tough stand on fishing rights, arguing that it will not take a sub-standard deal.
The pound is currently trading at around two year highs of around $1.35. Yet it slipped back from even higher towards the end of last week as doubts about a Brexit deal emerged.
No-deal Brexit: Pound could hit $1.15 or lower
Economists at consultancy Capital Economics said last week that the pound could tumble to $1.15 in the event of a no-deal Brexit.
Such an outcome would lead to disruption for businesses as well as higher tariffs for certain sectors. The UK’s budget watchdog has said it could knock two per cent off the economy next year.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said no deal could see sterling fall to $1.23. He said it could fall to about €1.04 against the euro, from its current price of €1.103.
Nomura currency analyst Jordan Rochester said the pound could even plunge to $1.01 in a worst-case scenario where “capital markets struggle to function” amid financial disruption.
However, Tombs said the pound was “less vulnerable” than in 2016, when it dropped sharply after the Brexit referendum.
He said it is now less dependent on external finance thanks to a lower current account deficit. And he said the Bank of England also has less scope to cut interest rates, which would hurt the pound.
Analysts and investors are torn on whether the UK and EU will reach a deal. Analysts at UBS said that if a deal is struck and vaccines aid the economy then sterling could hit $1.37 by the end of 2021.