The British pound fell on Tuesday after reports that UK Prime Minister Boris Johnson was seeking a hard line on Britain’s transition period after Brexit, effectively creating a new cliff edge in negotiations with Brussels.
The sterling dropped as much as 0.7 percent to $1.3236, as the one-and-half year high of $1.3516 reached on Friday looked increasingly like a near-term peak following the strong relief rally after last week’s UK election.
Johnson’s revised Withdrawal Agreement Bill would require the UK to have arrangements to leave the European Union be in place by December 31 next year, UK broadcaster ITV reported on Monday.
The move dashes hopes that Johnson would take a flexible approach to the end-2020 deadline for a trade deal with the EU after Britain leaves the bloc, which now looks almost certain to happen on January 31 following the landslide Conservative election win.
“Common sense suggests that crafting a trade deal would take at least more than a year, so markets had assumed that the transition period will be extended,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
“It seems like the big majority Johnson won is enabling him to take a hardline approach, which the market doesn’t like so much… Considering the UK economy looks set to deteriorate as people and companies start to leave the country because of Brexit, sterling’s short-covering rally is over,” he added.
Other major currencies saw limited moves as investors sought more details on an interim trade deal the United States and China struck last week. The deal has broadly capped safe-haven currencies, such as the Japanese yen, and supported risk-sensitive currencies.
Against the yen, the dollar traded at 109.56 yen, up 0.05 percent from late US levels, having gained 0.15 percent on Monday to edge near six-month high of 109.73 hit on Dec. 2.
The euro stood at $1.1147, maintaining its uptrend from its seven-week low of $1.1098 touched on Nov. 29.
The deal, announced on Friday after more than two-and-a-half years of volatile negotiations between Washington and Beijing, will reduce some US tariffs on Chinese goods in exchange for increased Chinese purchases of some US goods.