The pound on Wednesday gave back some of the previous day’s gains as worries over a no-deal Brexit clouded investor appetite for the currency despite German Chancellor Angela Merkel suggesting on Tuesday that there might be room for negotiation.
British Prime Minister Boris Johnson is due to meet Merkel on Wednesday ahead of a G7 meeting at the weekend and is expected to tell the chancellor that unless she agrees to change the Brexit deal, Britain will leave the European Union on Oct. 31 without a deal.
Merkel had said on Tuesday that she was open to “practical solutions” to the Irish border insurance policy, the so-called backstop, that Johnson says is unacceptable – lifting the pound to a two-week high – but that the Withdrawal Agreement was not to be reopened.
“This was viewed as a possible signal that the EU could be willing to negotiate on this point, but frankly I doubt it – I think she was just being polite,” said Marshall Gittler, chief strategist at ACLS Global.
Johnson is also due to meet French President Emmanuel Macron on Thursday as part of his first tour to meet European leaders after winning the British premiership a month ago.
The pound was down 0.2% at $1.2145, retreating from the 12-day high of $1.2180 reached on Tuesday. It has risen, however, by 0.8% since mid-August lows.
Against the euro, sterling was down by the same amount at 91.42 pence. Since mid-August, the pound has strengthened by 1.8% against the euro.
With Brussels looking unwilling to budge on the Irish backstop to keep the Irish border open after Britain leaves the bloc, MUFG currency analyst Lee Hardman said the EU and UK look on course for a no-deal Brexit unless there is a last-minute compromise or a change in UK government.
“As a result, we continue to believe that the risks for the pound are skewed to the downside even as the market has moved a long way in recent months to price in no-deal Brexit risk,” Hardman said.
To judge by prices in the derivatives market and investor positioning, market participants continue to expect the pound to weaken, albeit by less than some have previously suggested.