Sterling edged towards an eight-day low on Wednesday as growing uncertainty over the progress on Brexit negotiations weighed on the British currency with some investors unwinding long positions after a recent rally.
Failure could mean a delay until February, adding to the risk of businesses scaling back investment plans in Britain as uncertainty clouds the outlook beyond Brexit in March 2019.
“The EU have said they need to know by this week what the position of the UK is, as they need to prepare for the summit next week and markets are a bit nervous,” said John Marley, head of FX strategy at Infinity international, a currency risk management firm.
The British pound edged 0.4 percent lower to $1.3382 and was just trading above an eight day low of $1.3370 hit in the previous session.
Market expectations on sterling have shifted considerably in recent weeks towards betting on a breakthrough in Brexit negotiations with the British currency rising to more than a two-month high last Friday.
High-frequency indicators of market positioning and options market hedging have also shifted markedly to show some optimism emerging.
Though a tentative deal was rejected on Monday, some market strategists such as Nomura believe there is a 70 percent probability of a breakthrough in talks.
However, a bigger uncertainty over sterling’s outlook would be rising uncertainty on the political situation with Nomura strategist Jordan Rochester saying there is a rising possibility that a failure in talks may trigger a leadership contest.
“By removing the leadership at such a crucial phase in the negotiations, hopes of progress and/or transitional deal would collapse and would not be taken well by the public that already has a very negative view of the government’s handling of the negotiations,” they wrote in a note.
Against the euro, sterling weakened 0.4 percent to 88.35 pence.