Sterling slumped today after UK officials confirmed their hard-line stance on UK-EU trade talks, while disappointment ahead of the UK’s budget increased. On Thursday, Britain said that it wants binding obligations on access to the European Union’s financial market.
If the country loses access to this, London, which is Europe’s largest financial sector, would face being barred from its largest market for services including banking, asset management and insurance.
However, Chancellor of the Duchy of Lancaster Michael Gove told parliament earlier today that the country would not “trade away its sovereignty” in pursuit of a trade deal with the bloc.
The UK also stated that it would be ready to walk away from negotiations if “good progress” was not made by June.
Commenting on this, forex analyst at broker Monex Europe, Simon Harvey said: “The pound has reversed early gains as the government firmly places the prospect of no-deal back on the table in order to strong-arm the EU’s dynamic alignment to bend to their will.
“The resumption of trade uncertainty comes just as business optimism starts to improve, suggesting the Brexit headwind to the economy may not have abated quite just yet and hence the need for heightened fiscal stimulus.”
Expectations the country’s March budget will disappoint also weighed on the pound today, sending the pairing to the lowest level since the beginning of February.
New Chancellor Rishi Sunak has been told by Treasury officials that he cannot simultaneously increase public spending and keep taxes low as Prime Minister Boris Johnson would prefer.
The possibility of increased spending had previously buoyed the pound, allowing the currency to strengthen in recent weeks despite nagging UK-EU trade worries.
Meanwhile, the single currency made significant gains against the pound after the bloc’s business confidence was better than expected in February.
Eurozone business confidence was reported at -0.04, up from an upwardly revised -0.19.
Looking ahead, the euro could extend today’s gains following the release of Friday’s German inflation data.
If inflation in the bloc’s largest economy edges higher, nearing the Bundesbank’s target, the single currency will continue to rise against the pound.
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