Pound traders are positioning for a choppy ride as trade negotiations between Britain and the European Union reach a watershed moment.
The currency suffered its biggest drop in close to three weeks after the EU’s chief negotiator Michel Barnier said a deal wasn’t guaranteed, while the relative cost of hedging against a weaker sterling climbed to a nearly seven-month high.
Traders are getting jumpy as the Dec. 31 deadline to reach an agreement nears. Many investors expect the two sides to strike a deal, which leaves the currency vulnerable to any setbacks that could upend that assumption.
Barnier told EU ambassadors that the three main obstacles to a trade deal with the U.K. remain unresolved: a level playing field for business, access to British fishing waters and the way in which the overall agreement is enforced.
The pound fell as much as 0.6%, its biggest drop since Nov. 12, to $1.3339. It briefly matched a three-month high earlier in the session, with officials racing to strike a deal before the start of next week.
The moves come after the pound advanced about 5% since late September on mounting optimism for a trade deal and broad dollar weakness. The currency is likely to rise again if an agreement is reached but the outlook isn’t bright, according to Standard Bank’s Steven Barrow.