(Bloomberg) --
The pound tumbled to a one-month low after U.K. Prime Minister Boris Johnson told German Chancellor Angela Merkel a Brexit deal is impossible under terms the European Union demands.
Dimming prospects of an accord between Britain and the EU sent sterling sliding against all of its major peers. Further souring the mood, European Council President Donald Tusk accused Johnson of playing a “blame game“ in a comment on Twitter.
The pound fell as much as 0.7% to $1.2205, the weakest level since Sept. 4. Strategists surveyed by Bloomberg estimate it would plunge to $1.11 -- the weakest level since 1985 -- if the U.K. left the EU without a divorce deal in place. Many of them say an extension of negotiations is more likely.
“The last trading weeks have been one big highlight of how fragile the rally in the pound was over August and September,” said Lars Merklin, a strategist at Danske Bank A/S. “The coming weeks will likely bring an extension of the Brexit deadline.”
Britain's Parliament is set to be suspended from this evening, leaving an EU summit next week as the focus for traders, who may see it as a last chance to strike a deal before the Oct. 31 departure date set by Johnson.
Options trading points to greater optimism that a no-deal Brexit will be averted this month, with a gauge of sentiment for the next week headed for the most positive close in four months.
Strategists disagree on what impact a further extension to the Brexit deadline would have on foreign-exchange markets. While removing the immediate threat of a crash exit would be positive, there are already signs the uncertainty prompted by a delay has dented the economy, potentially paving the way for the Bank of England to ease monetary policy.
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Deutsche Bank AG's head of currency research George Saravelos sees “plausible and radically different outcomes for the pound” on an extension, he wrote in a note last week, including an election that may finally determine the currency's outlook.
To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Neil Chatterjee
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