Analysts warn UK currency likely to remain unstable as uncertainty over negotiations on EU divorce continue
EU chief negotiator Barnier's Brexit comments roil the pound
Uncertainty over the British currency continued on Thursday as it slipped after the European Union’s chief negotiator Michel Barnier toned down expectations regarding a Brexit deal.
A surprise rally against the dollar on Wednesday petered out as Mr Barnier appeared to walk back the optimistic language on a deal he had used during a press conference in Berlin.
Shortly after Mr Barnier’s comments on Wednesday the pound rose 1.2 per cent against the dollar to $1.30 and to 1.11 against the euro. On Thursday it slipped back to $1.29.
Experts cautioned against making long-term predictions based on the events of the past 24 hours and said the rise and fall of the currency showed how unstable the pound was.
“The pound is pretty volatile and it’s a little bit of a fool’s game predicting its movements. We have to be a bit careful of making predictions over events that are inherently volatile,” Laith Khalaf, senior analyst at Hargreaves Lansdown, told The National.
“It’s extremely difficult to predict financial outcomes from political events, that is a lesson the EU referendum taught us. Most people didn’t predict the UK would leave, for instance,” he added.
“We are ready … to propose a partnership like there has never been before with any other third country,” Mr Barnier told a Berlin press conference alongside German Foreign Minister Heiko Maas on Wednesday.
This could potentially include “an ambitious free-trade agreement” as well as security and foreign policy cooperation. He did, however, warn against anything that could damage the EU single market. “We respect Britain’s red lines scrupulously. In return, they must respect that is what we are,” he said. “Single market means single market… There is no single market a la carte."
Despite these comments, on Thursday Mr Barnier told a German radio station that the EU was also preparing for a "no-deal" Brexit.
With only seven months to go until the UK supposedly leaves the EU, talks between Brussels and London on the exit terms have spluttered along.
For September as a whole, the currency is heading for a fifth monthly loss, having been hurt by worries over a lack of a Brexit deal and scaled back expectations for Bank of England interest-rate increases.
The UK’s Brexit secretary Dominic Raab told a House of Lords committee this week that he was “confident a deal is within our sights”.
“We're bringing ambition, pragmatism, energy and if, and I expect it will be, and if it is matched, we get a deal,” he said.
The UK’s ruling conservative party has been riven by divisions over Brexit policy, leading to a number of high-profile resignations from the cabinet. Following discussions at Chequers last month, Prime minister Theresa May has sought out a "soft Brexit", whereby the UK would still have close links to the EU.
Neil Wilson, chief analyst as Markets.com, said there remained a “degree of scepticism” with no concrete deal yet agreed, according to Reuters.
There have been fears of a no-deal Brexit and last week the British Chancellor, or finance minister, Phillip Hammond warned of the “fiscal consequences” if such an event were to happen.
“Based on the trading we have seen to date, it would be natural to expect a close deal [with the EU] to prompt a rise in the pound. The high changes of a no deal have partly been shown by the instability of the pound and the current levels we see,” said Mr Khalaf.
“Currencies are by their nature unpredictable. For the foreseeable future, notwithstanding huge developments in Brexit, we could see further drops and rises in the pound,” he added.