Sterling back on roller-coaster against euro on Brexit reports                                           

Sterling is the most erratic among the Group-of-10 nations after Norway’s krone.

The pound fell to $1.2906, and it was down 0.3% against the euro to just over 91 pence.

Traders are bracing for more erratic behaviour from the pound after it whipsawed on conflicting news about trade negotiations between the UK and EU.

It first fell on reports that officials were at loggerheads on the issue of state aid, and that the EU was starting legal proceedings against the UK over its plans to breach the terms of its withdrawal agreement. 

Then it gained on reports that officials may have reached a compromise on state aid. 

And in a final twist, the currency dropped after EU officials said there is no increased optimism in Brexit talks.

Those swings lifted sterling’s one-week implied volatility to the highest since September 15, making the currency the most erratic among the Group-of-10 nations after Norway’s krone. 

It’s a sign that the pound, which spent most of 2019 swinging between positive and negative headlines on Brexit, is once again serving as a barometer to trade negotiations after a year so far dominated by Covid-19.

“Things really changed with the publication of the internal market bill,” said Adam Cole, head of currency strategy at RBC Europe.

Brexit had been dormant until that point, but it will be the key driver for the pound for the rest of the year.

UK prime minister Boris Johnson is planning to introduce legislation that would override parts of the Brexit withdrawal agreement he signed, which would be in conflict with international law. 

The move, together with the EU’s response legal response, highlight tensions between the two sides as trade negotiations enter a critical phase. 

The UK’s transition period from the EU ends at the end of the year.

“FX markets are keen to get some direction and this is why they are jumping on the headlines,” said Valentin Marinov, head of G-10 currency strategy at Credit Agricole. 

“The worry is still that, with crunch time still two months away, there is no real urgency to deliver a deal just yet,” he said.

The pound fell to $1.2906, and it was down 0.3% against the euro to just over 91 pence.

Ulrich Leuchtmann, head of currency strategy at Commerzbank, expects the pound to trade at 92 pence against the euro by the end of the year assuming a weak trade deal is reached, though he’s still flagging the risk of a no-deal scenario to clients.

“In that case, they should prepare for something like 15% pound depreciation” over a prolonged period, he said. 

Bloomberg