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The pound has sunk in early trading today ahead of a Boris Johnson speech in which the Prime Minister is expected to demand a looser trade deal with the EU that could spell a hard Brexit.

Sterling fell over one per cent against the dollar to $1.3069 ahead of the Prime Minister’s speech. Johnson is set to start UK-EU trade deal negotiations today with the aim of securing a Canada-style free trade deal.

What does an Australia-style trade deal mean?

But if they fail to secure a deal by December 2020, Johnson will say he will fall back on a hard Brexit. That would see the UK trade on World Trade Organization (WTO) terms.

While a Canada-style deal would enable tariff-free and quote-free trade on goods, a WTO-style deal would buck City expectations of tighter alignment with the EU.

Instead, the model would look similar to Australia’s own arrangements, defaulting on WTO terms with the potential for sector-specific side-deals. That includes the potential for significant new tariffs and other barriers to trade.

“It would appear that the currency has taken a look at what comes next Brexit-wise … and had a bit of a wobble,” Spreadex financial analyst Connor Campbell said.

“Its fears aren’t unfounded. They are based on the details of a speech Boris Johnson is set to deliver to businesspeople and ambassadors. [It will state] that the UK will refuse close alignment with EU rules and reject the jurisdiction of European courts.”

Pound ‘vulnerable’ to hard Brexit strategy

Sterling sank as much as one per cent against the dollar to hit $1.3064 shortly after 10am.

Then it extended its fall to tumble 1.25 per cent against the dollar to $1.3035 in the afternoon.

Even a nine-month high in the UK manufacturing sector could not limit the pound’s fall.

Economists warned the pound was at risk as a result of Johnson’s latest Brexit strategy. Kit Juckes, of Societe Generale, said: “Brexiteer politicians are moving from celebrating the exit to sounding bold as the trade talk verbal jousts begin. With positioning data still suggesting an excessively long speculative position in the market, sterling is vulnerable.”

London Capital Group’s head of research, Jasper Lawler, added: “If the main purpose of Boris Johnson’s speech is to get across the idea that the UK does not plan to align with EU rules, the pound could come under renewed pressure.

Foreign secretary Dominic Raab previewed the UK’s stance last weekend. He said: “We are taking back control of our laws, so we are not going to have high alignment with the EU, legislative alignment with their rules.”

The future of financial services is set to be a hot topic in the UK-EU trade deal talks. UK firms’ access to European markets will be key, amid other issues like fishing rights.

Johnson could walk away from EU trade talks if the sides cannot reach a deal, and pursue a hard Brexit instead.

But he said negotiations over the Canada-style model and Australia-style model were not a choice between “deal or no deal”. Instead he said: “In either case, I have no doubt that Britain will prosper.”

FTSE 100 enjoys boost at sterling’s expense

The pound’s fall boosted the FTSE 100, which recovered some of Friday’s deep losses. By 10.30am, the index was up 0.5 per cent at 7,324 points.

That contrasted heavily with China’s nine per cent drop as the Shanghai Stock Exchange returned after an extended break.

“Ultimately the coronavirus has been very damaging for anyone with money invested in the markets via their pension or investment accounts,” AJ Bell investment director Russ Mould said.

“However, markets outside of Asia on Monday showed signs of stabilisation.”

“The FTSE 100 was flat at 7,285, somewhat helped by the pound weakening against the dollar, down 0.6% to $1.3130. That’s generally good for companies whose shares are priced in pounds but who earn in foreign currencies including the dollar.

“In terms of the sectors suffering as Shanghai’s market reopened, worst hit were telecommunications, industrials, tech and consumer cyclicals.”

Pound gives up Bank of England gains

Sterling shed gains made last week after the Bank of England voted to hold interest rates.

Neil Wilson, chief markets analyst at Markets.com, said the pound’s slide shows traders are again entertaining the risk of a no-deal Brexit.

“No deal is not the base case by any means but the EU and UK look in very different places right now,” he said.

“It’s going to be a very long and rocky road to get there and the shape of the deal will hinge on some important concessions on both sides. The British government has come out swinging over the weekend with plenty of fighting talk. But they’re up against a tough opponent.”

“We are left at present at something of an impasse before the talks even begin.”

Ranko Berich, head of market analysis at Monex Europe, added that sterling’s drop feels like Groundhog Day.

But the difference is Johnson is being wary of being seen as inflexible, he added.

“On the whole, although Barnier and Boris have indeed set out markedly different visions for trade relations, the UK Prime Minister was careful not to emphasise any of the sort of red lines that sunk his predecessor’s negotiations with the EU.”

By Joe Curtis

Source: City AM

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