As Britain approaches yet another new deadline to strike a trade deal with the European Union on Sunday, the pound is closing out its worst week in three months. It took a sharp turn lower against the euro on Thursday, and sunk further on Friday, as traders grappled with the prospect that Britain’s trade talks with the European Union could really fail.
“The markets tend to think as long as they are talking there is hope. I’ve been really cautious about that,” said Jane Foley, a strategist at Rabobank. “There may not be a deal but there will be disruption, even if there is a deal. And there will be political fallout.”
All of which, is bad for the currency.
In just under three weeks, the Brexit transition period will end and, if no agreement is reached, Britain will be forced to do business with its largest trading partner on World Trade Organization terms, meaning tariffs would be introduced on goods and there would be less chance of future cooperation between services industries. So far three issues — fishing rights, business competition rules and how a deal will be enforced — have stalled the talks.
Prime Minister Boris Johnson went to Brussels on Wednesday night to dine with the European Commission president, Ursula von der Leyen, to try a breach the impasse. By time the fish dinner was over, there were reports that the outlook for a deal were even more gloomy. A new deadline was set for Sunday.
Then on Thursday, the European Commission laid out its plans for what it would do if there was no deal. And Mr. Johnson said an agreement was “not yet there at all” and that there was a “strong possibility” of no deal.
The perpetual optimism of the financial markets has been tested many times before. Innumerable Brexit deadlines have come and gone. But this time, there is serious concern about how an agreement, if one is reached, could be ratified into law before Jan. 1. The British Parliament is preparing plans to work until Christmas, but the European Union will have a harder time gathering 27 nations over the holiday period.
This week has been the worst for the pound since early September, when traders got spooked that Boris Johnson would thwart a trade deal by introducing a new bill that clashed with the E.U. withdrawal agreement and break international law.
Even before the end of the transition period, Britain got a glimpse at the type of disruption that occurs when trade isn’t running smoothly, when Honda shut down its assembly plant in England this week because parts were stuck in transit.
The economic impact of more trade disruption in the new year once customs checks begin will weigh on a British economy attempting to scratch out a recovery during a second wave of the pandemic. Data on Thursday showed that gross domestic product increased 0.4 percent in October, a slowdown before England went into a monthlong lockdown in November.
Stocks dropped around the world on Friday and futures indicated the S&P 500 index would open 1 percent lower, as investors steered away from risky assets despite news that the United States was likely to authorize the Pfizer-BioNTech vaccine within days. Instead traders are facing the prospect of a no-deal Brexit and months of economic hardship as countries still struggle to contain the virus.
The Stoxx Europe 600 index fell 1.3 percent. The FTSE 100 index in Britain fell 1.1 percent, the CAC in France declined 1.3 percent, and the DAX in Germany was 2 percent lower. In Asia, the Shanghai composite index closed down by 0.8 percent, and the Nikkei 225 in Japan was 0.4 percent lower.
The S&P 500 index is on track to break two straight weeks of gains. When markets closed on Thursday, the U.S. benchmark index had fallen 0.8 percent so far this week.
Oil prices also fell on Friday, pulling back from a rally the day before when prices jumped to their highest since March. Futures of West Texas Intermediate, the U.S. benchmark, declined 0.5 percent to $46.57 a barrel.
Instead, traders bought traditionally safe assets such as government bonds. The yield on 10-year U.S. Treasury bonds fell 8 basis points, or 0.08 percentage points, this week, the most since June. Yields move inversely to prices.
Prime Minister Boris Johnson of Britain and the European Commission president, Ursula von der Leyen, have both said that it was looking more likely that Britain and the European Union would not come to an agreement on free trade by the end of year. Talks are expected to continue through the weekend.
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