Sterling and European shares fell as the risk of the UK accidentally dropping out of the EU without a deal increased, as European Council President Donald Tusk told Theresa May she can have a short Brexit delay but only if the deal is voted through by the UK parliament next week.
Sterling fell 0.6% against the dollar and traded at around 86 pence against the euro. Shares in the three Irish stock market-listed banks fell sharply, with AIB down by 3.5%.
Since the UK referendum in the summer of 2016, the UK currency has been a gauge to the risks of a hard or no-deal Brexit but the currency still suggests that investors expect that some sort of deal will be done.
Markets have largely priced out the chances of a no-deal Brexit but uncertainty about how and when Britain will leave the EU have kept sterling traders on edge.
Owen Callan, senior analyst at Investec Ireland, said the risk of an accidental Brexit in which the UK crashes out without a deal had risen. It is “an unlikely outcome” but not a totally unfeasible scenario, he said.
Viraj Patel, an analyst at financial advisory Arkera, said the best hope for sterling “is that May’s deal gets over the line” as it would lower uncertainty.
Market volatility gauges in the pound remained firm even as other gauges, such as one-month euro volatility indexes, fell.
- UBS strategists said.
British government bond yields also fell.
Additional reporting Reuters.