The pound dropped on Friday as Brussels told EU leaders that no-deal appears to be the most likely outcome of trade talks with the UK, echoing a warning from Boris Johnson.
Sterling slipped 0.6 per cent against the dollar to $1.3216, taking its loss this week to 1.6 per cent — putting the currency on track for its worst performance since September.
The slide came as Ursula von der Leyen, European Commission president, told an EU summit on Friday that there was a “higher probability” that talks would fail rather than succeed, although she did not want to give a percentage, according to people briefed on the presentation.
Her gloomy assessment in Brussels echoed a warning on Thursday from UK prime minister Mr Johnson that there was a “strong possibility” talks would fail because Brussels wanted to keep the country “locked in the EU’s orbit”.
Mr Johnson’s visit to the Belgian capital earlier this week failed to yield a breakthrough. Although both sides have given negotiators until Sunday to try to engineer a breakthrough, one ally of Mr Johnson said: “They aren’t moving at all. It’s screwed.”
Failure in the trade negotiations would bring with it economic upheaval, including the introduction of tariffs on EU-UK trade after the end of the Brexit transition period on December 31, which would strike an especially hard blow to agriculture.
But it is an outcome that both sides say they are prepared to accept if a compromise cannot be found on the central sticking point of how to ensure fair competition between companies.
The EU has insisted that any deal must guarantee a “level playing field” that endures over time. It has proposed that either side should be allowed to reduce access to its market if EU and UK rules in areas such as environmental law diverge to a point where companies are placed at a competitive disadvantage.
But Mr Johnson has said the plans amount to an attempt by Brussels to force the UK to continue to follow its regulations.
“They’ve brought back the idea of equivalence between the UK and the EU,” the prime minister said in a Downing Street TV clip on Thursday. “Basically that means that whatever new laws they brought in we would have to follow, or else face punishment, sanctions, tariffs, whatever,” he added.
An EU official said that Ms von der Leyen made clear at the summit that the situation was difficult and that the “main obstacles remain”. The commission president was debriefing leaders on her Wednesday dinner with Mr Johnson, an encounter that it had been hoped would give talks fresh momentum.
She said that negotiations would resume today in Brussels between EU chief negotiator Michel Barnier and his UK counterpart, David Frost.
Trade experts insist that, despite the dire warnings from both sides, there is in principal a compromise zone to be explored between Britain’s position — a willingness to pledge not to water down regulatory standards as they stand at the end of its Brexit transition period — and the EU’s quest to future-proof any trade deal.
The consensus among market analysts and investors remains that some form of deal can still be sealed.
Sterling could suffer further if a deal is not agreed, said Mark Haefele, chief investment officer at UBS Global Wealth Management. “But next week remains in play, and our base case is that a deal will be reached,” he added.
EU leaders devoted only a few minutes to Brexit at their meeting, with no discussion after Ms von der Leyen’s presentation. French president Emmanuel Macron, German chancellor Angela Merkel and other heads of government spent the entire night debating the bloc’s future climate policy after Poland raised objections to new targets.
The summit, which began on Thursday, is the leaders’ last scheduled meeting of 2020, with issues including eurozone reform, the EU budget and future relations with Turkey also on the agenda.