Sterling weakened against the dollar on Thursday on worries that Britain might not manage to clinch a transition deal with the European Union at a summit later this month. Even against a euro shaken by the cautious tone of the European Central Bank’s chief at a press conference after a policy meeting, the pound could only eke out a 0.1 percent gain, trading at 89.13 pence per euro. ECB President Mario Draghi’s comments overshadowed the central bank’s dropping of a long-standing pledge to increase its bond purchases if needed, a move that briefly spurred buying of the single currency before it tumbled 0.8 percent on the day against the dollar.
“Draghi struck a softish tone in the press conference, in particular as victory on inflation cannot be declared yet,” wrote Danske Bank strategists in a note to clients. “Overall, our ECB view is not changed based on today’s events, as it included little new guidance. Importantly, the decision today was taken unanimously.” European Council President Donald Tusk said on Thursday that Brexit negotiations risk stalling if Britain does not present a realistic solution for the future of the Irish border, after London rejected an EU fallback proposal last week.
Britain’s government has said it does not want a customs union with the EU, without which the EU says it would need to regulate Northern Ireland’s trade to avoid a return of customs checks. But British leader Theresa May, backed by her hard-line pro-British Northern Irish parliamentary allies, said no prime minister could ever agree to such terms, which would “threaten the constitutional integrity of the UK”. British Finance Minister Philip Hammond said on Wednesday that a transition deal would be concluded this month, but investors remain uncertain.
Sterling traded down 0.7 percent on the day at $1.3810, not far from a 1 1/2-month low of $1.3712 hit last week.
“The pound continues to remain on a softer footing in the run up to the forthcoming EU Leaders Summit,” said MUFG macro strategist Derek Halpenny. “If a transition deal is secured in the coming months, it would leave the door open for the BoE (Bank of England) to raise rates again in May,” he added. “Overall, we continue to see scope for the pound to strengthen in the coming months.”
A Reuters poll of analysts on Wednesday forecast that sterling would trade slightly higher in a year’s time, near $1.41. That would be less than a month before Britain is formally due to leave the EU, indicating currency strategists remain optimistic that London and Brussels can manage a smooth exit and transition deal.