Pound swings after Johnson lays down no-deal gauntlet to the EU

The pound fluctuated between gains and losses after U.K. Prime Minister Boris Johnson said the nation was heading towards no deal with the European Union, while still holding out room for more negotiations this year.

Sterling erased gains of as much as 0.4%, to fall 0.3%, before rising again to $1.2923 as of 3:18 p.m. in London. Government bonds extended their advance, sending the yield on 10-year securities down as much as three basis points to 0.15%. EU Commission President Ursula von der Leyen said that a team would go to London to “intensify” talks.

The “limited pound sell off suggests market participants see comments from Boris Johnson as mainly political posturing at this stage,” said Lee Hardman, a foreign-exchange strategist at MUFG Bank. “We are moving closer to the crunch point.”

Given that sterling has been buffeted by the ups and downs of the Brexit saga to leave the EU for the past four years, traders have grown accustomed to filtering out the noise. Also, trade talks are competing for market impact with the spread of the coronavirus.

That’s why the U.K.’s recent threats to pull out of talks have only caused relatively mild dips in the pound. This is also reflected in options, where so-called butterflies show the likelihood of large moves is much lower than in previous periods of Brexit stress.

“Uncertainty remains very, very high, but we have been living with these issues for many years now,” said Ned Rumpeltin, head of foreign-exchange strategy at TD. “Beyond mere Brexit fatigue, we are starting to think that FX markets are simply ready to move on to the next stage of the process.”

Johnson said the U.K. will now get ready to leave the EU’s single market and customs union without a new free trade deal in place—describing it as an Australia-style agreement—blaming the bloc for refusing to offer good enough terms. Von der Leyen said that the EU continues to work for a deal, but not at any price.

Monex Europe Ltd, which assumes a bare-bonds deal, sees sterling at $1.31 by the end of the year, while Rabobank estimates that such a deal would spur a half-hearted rally before settling at $1.30 within three months.

The estimates are a far cry from predictions of $1.40 and higher that analysts were making a couple of years ago on the prospect of a Brexit trade deal. The U.K. is dealing with a resurgence in virus cases, and the government has announced localized restrictions to contain them, boding badly for a recovery in growth.

“Business’ capital buffers have just been decimated,” said Simon Harvey, a currency market analyst at Monex. “Obviously the wider the deal and the closer towards a Free Trade Agreement it becomes, the more upside for the pound, but it’s much more limited given the current climate.”

Jobless figures are up the most on record after Covid-19 caused the worst recession in more than a century. The downturn has already led to record low Bank of England interest rates and money market bets on further cuts, another millstone for any gains in the currency.

The U.S. election could act as another constraint on pound movement, especially if the outcome of trade talks comes in the midst of it, according to Standard Bank’s Steven Barrow.

Taking Stock

Johnson’s announcement isn’t likely to bring relief to stock investors, who are also bracing for tighter coronavirus-related restrictions as U.K. cases rise.

The country’s equities have underperformed global peers since the Brexit referendum, and are trading at historically low relative valuations.

The FTSE 100 Index, which maintained gains at more than 1% on Friday, is at a “double crossroads” that could create a more than 50-percentage-point swing in the gauge in the next six to 12 months because of the twin risks from Brexit and Covid-19, Bloomberg Intelligence strategists Tim Craighead and Laurent Douillet wrote earlier this month.

Their fair-value model suggests an upside of about 35% or a downside of roughly 20%, depending on how the two events unfold.

“Boris Johnson falls short of saying that he will stop negotiating altogether, which I guess is the reason why markets are calming down a bit again here,” said Mikael Olai Milhoj, an analyst at Danske Bank A/S.