Sterling falls to eight-month low as Brexit pressures grow

By Tommy Wilkes, Tom Finn

LONDON (Reuters) - The pound fell to its lowest since early November on Thursday as investors fretted that the message to emerge from a European Union summit will be that there has been no meaningful progress for months in negotiations on a Brexit deal.

The lack of progress on Brexit, combined with a raft of corporate warnings this week about the hit to Britain’s economy if a deal is not agreed soon, has weighed heavily on sterling and lowered expectations of a Bank of England interest rate rise.

The pound fell 0.25 percent to $1.3050, an eight month low, after Ireland’s Prime Minister Leo Varadkar said on Thursday the country would have to start making preparations for the unlikely scenario of Britain crashing out of the European Union without a deal.

EU leaders gather in Brussels on Thursday for a summit from which the outline of a post-Brexit deal was once expected.

But Brexit has been pushed to the bottom of the agenda and investors are expecting only an update on progress for agreeing an arrangement for the future border between Ireland and Northern Ireland and for the future trading relationship between the EU and Britain.

At 1345 GMT the British currency was down 0.3 percent versus the dollar at $1.3079 and also down half a percent against the euro at 88.71 pence, its weakest since March 15.

The incoming member of the BoE’s rate-setting team, Jonathan Haskel, replaces a relatively hawkish policymaker and this week he signalled a more dovish tone than some expected. Markets are pricing in an 84 percent chance of a single 25 basis point hike by the end of 2018.

The latest drop means the pound has tumbled more than 9 percent since a post-Brexit referendum high in April. It has been sent lower in part by a resurgent dollar but also by mounting worries about Britain’s economy less than a year before Britain departs the EU.

“We have the EU summit and there is always nervousness around Brexit. There are also concerns about no interest rate hikes. That’s all adding up to the negative sentiment,” said Niels Christensen, a currencies analyst at Nordea in Copenhagen.

Nordea has a 3-month target price of $1.28 and believes further weakness is headed sterling’s way because there will be no rate rise in 2018 and because the talks with the EU over Brexit will reach a crunch point after the summer.

Britain and the EU have given themselves a deal deadline of October.

Other analysts said the market remained relatively unmoved by Brexit worries, however, because traders remained confident a last-minute deal would be reached.

“The market is only going to get really nervous a few days before the deadline. Until then I do not expect any major momentum for the sterling exchange rates from any Brexit news. As a result today’s World Cup match against Belgium is likely to be of more interest to the Brits than the EU summit,” Commerzbank analysts said.

This week has seen some evidence that Brexit uncertainty is already hitting the economy, with a halving in new investment in the British car industry.

Reporting by Tommy Wilkes and Tom Finn; Editing by Toby Chopra/Keith Weir