Pound volatility is expected to be high today and on Monday as the markets await Prime Minister Boris Johnson’s decision on whether the UK stays or leaves the Brexit negotiating table.

In the meantime, England is dealing with the rise of new Covid-19 cases and restrictions which will come into force under the government’s new three-tier system with London facing tighter restrictions from midnight on Friday.

Under this generalised gloomy climate, investors are waiting to hear whether the UK will continue with the Brexit talks. Last month, Johnson had set a deadline for a possible deal for the 15th October, and said that if nothing had been agreed, both sides should “accept that and move on.”

At a Brussels summit on Thursday, the EU proposed “two to three weeks” of negotiations. Investors are now closely watching to see whether the PM will try and resume the negotiations or stick to his threats and walk away.

Brexit pessimism pushed the pound lower against the US dollar, while it remained flat against the euro. At the same time, the prospect of tighter lockdown restrictions could further hurt the pound and threaten economic recovery. Jasper Lawler, head of research at LCG, said that more lockdown measures could push the UK and European economies into a deep recession: “The British government is under pressure to follow scientific advice for a 2-week circuit breaker national lockdown but has so far resisted, but has raised the capital to the Level 2 tier of restrictions. That means two different families can no longer mix indoors- be that in their home or in a pub or restaurant. There is still no sign of the joint European recovery fund so in the meantime economies stand to take the hit – risking a double dip recession – from the new restrictions.”

Angela Merkel urges Boris Johnson to keep negotiating over Brexit

The German chancellor has urged Boris Johnson to continue and not to walk out of the trade and security negotiations. In her comments that were designed to calm the atmosphere, Merkel said that both sides needed to find common ground: “In some places things have moved well, in other places there is still a lot of work to be done. We have asked the United Kingdom to remain open to compromise, so that an agreement can be reached. This of course means that we, too, will need to make compromises.” Her comments also come after Thursday’s summit where French president, Emmanuel Macron, demanded that the UK accept the bloc’s conditions or face a no-deal exit.

The EU had proposed a further “two to three weeks” of negotiations as the EU’s chief negotiator, Michel Barnier is scheduled to be in London on Monday to continue negotiations. Like Merkel, Barnier also said that the EU wants to give every chance to the negotiations so they are successful: “We’re available, we shall remain available until the last possible day.”

The UK’s chief negotiator, David Frost, expressed his disappointment after Thursday’s summit and tweeted: “Disappointed by the conclusions on UK/EU negotiations. Surprised EU is no longer committed to working ‘intensively’ to reach a future partnership as agreed with [the European commission president, Ursula von der Leyen] on 3 October. Also surprised by suggestion that to get an agreement all future moves must come from UK. It’s an unusual approach to conducting a negotiation.”

The foreign secretary, Dominic Raab, said that a deal was still possible: “We’ve been told that it must be the UK that makes all of the compromises in the days ahead, that can’t be right in a negotiation, so we’re surprised by that, but the prime minister will be saying more on this later today. Having said that, we are close [to a deal]. With goodwill on both sides we can get there.”

While challenges remain when it comes to the Brexit negotiations with the level playing field, fisheries, and governance, still unresolved, many are positive that there could be an agreement if significant work is done.

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