A buoyant U.S. dollar, helped by uncertainties in the eurozone, is weighing on the British pound and making this Monday a particular painful start to the week for traders wagering that a Brexit deal, which would likely give sterling a boost, could be near.
Sterling GBPUSD, +0.0778% was looking at its worst one-day drop in nearly two-months on Monday, according to Dow Jones Data Group, as the U.S. dollar DXY, -0.05% was too strong an opponent and recent updates to negotiations failed to provide any clear support for sterling. The pound last bought $1.2858, down from $1.2974 late Friday in New York.
“I am still long the pound via the euro and the dollar,” said Jordan Rochester, currency strategist at Nomura, “but the dollar rally here [is] making that very painful.”
“A deal is too close for me to take that off now, but for day traders I don’t expect any news to turn market sentiment around today,” he said.
The rumor mill around a Brexit deal between the U.K. and European Union has been turning fast, with officials from both sides repeatedly claiming a deal was near, even as others voiced skepticism. On Monday, EU chief negotiator Michel Barnier said the main elements of a deal for Britain to exit from the EU will be presented on Tuesday, according to a report by the Financial Times, leading to worries over whether U.K. Prime Minister Theresa May would be able to get support from her cabinet.
May’s spokesperson, however, countered Barnier’s comments, saying they should be taken with a “bucket of salt” and that negotiations were continuing, according to British news.
Meanwhile, pro-Brexit conservatives, as well as members of the Northern Irish DUP are expected to vote against any deal if it doesn’t prioritize Northern Ireland’s issues over those of the EU.
The border between Northern Ireland and the Republic of Ireland—a member of the EU—has been at the center of the debate, and lawmakers can’t agree what should happen after the U.K. leaves the customs union.
“Whenever a deal was to be agreed we expected both sides of the Brexit argument to claim it’s the worst and that it won’t get through. That is precisely what we are witnessing now with a deal close at hand, both sides pushing as hard as they can before it’s too late,” Rochester said.
With both parties running out of time ahead of the March 2019 deadline, “kicking the can down the road is becoming less of an option,” he added
Infighting in May’s administration has led investors to expect her leadership to be challenged by members of her own ranks. Her cabinet also went through a number of resignations over the summer. As recently as last Friday, Transport Minister Jo Johnson—brother of former London mayor and Foreign Secretary Boris Johnson—resigned over how Brexit has been handled, shaking things up again.
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