Pound drops from 3-month high on Brexit reality check

Bloomberg

The pound pulled back from a three-month high and UK government bonds rallied as traders reassessed the prospect of the UK securing a Brexit deal this week.
Sterling dropped as much as 0.9% against the dollar after surging 3.8% during the previous two days amid optimism the two sides would reach an agreement to avoid a no-deal. The European Union’s chief Brexit negotiator Michel Barnier told envoys that UK Prime Minister Boris Johnson’s proposals for breaking a deadlock over the Irish border risked
leaving the bloc’s single market vulnerable to fraud, officials said.
“After the best two-day rally in 10 years, sterling euphoria as regards the prospects of an imminent deal is wearing off,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce. “The prospects of a deal have dimmed from the extremes seen on Friday.”
The pound was 0.8% weaker at $1.2568 in London, after climbing as high as $1.2707. UK government bond yields fell eight basis points to 0.63%, as money markets priced in 20 basis points of Bank of England interest-rate cuts in December 2020 versus 17 basis points.
The currency is still down about 15% since the day before the Brexit referendum in June 2016. The recent rally could have much further to run if a Brexit deal is secured but the pound has far to fall without one, according to Mizuho Bank Gains could extend as far as $1.30 if a divorce agreement emerges, and if Johnson’s plan fails it could slump to $1.22.
Talks were due to continue in Brussels on Monday with a spokesman for the UK Prime Minister saying “significant work” was still needed. Negotiators are now in a race against time to reach an accord for EU leaders to endorse at a summit that starts on Thursday.
“We should know soon whether it’s going to be possible to have a deal together before the EU Leaders’ Summit at the end of the week,” TD Securities’ strategists including Richard Kelly said. “Boris Johnson has a very tough balancing act ahead in trying to keep the Democratic Unionist Party onside, but also come up with something that works for the EU.”
The so-called “tunnel” negotiations between the UK and the EU over Brexit could sustain the pound’s rally, according to Goldman Sachs .