The British pound has fallen significantly against the euro, amid fears that the progress of the Brexit talks is stalling and may result in an unstable future for the UK.
Confidence in the sterling was also sapped by manufacturing data that highlighted the weak state of the British economy.
Sterling trade had picked up last week as markets were buoyed by reports that the EU’s chief negotiator Michel Barnier was moving ever closer to a trade agreement in the Brexit talks.
However, a turbulent weekend which saw Prime Minister May’s former foreign secretary Boris Johnson heavily criticise her Brexit proposals while the leader of the Brexit Research Group, backbench Tory MP Jacob Rees-Mogg, described May’s Brexit withdrawal blueprint as “absolute rubbish.”
The prospect that May’s government could fail to reach an agreement that would gain parliamentary approval at home, and that Britain could potentially crash out of the EU in March with no deal in place, has worried financial markets.
“Markets clearly misunderstood Barnier’s comments last week and even in the light of today’s moves, investors are still underpricing the risk of a hard Brexit,” said Ulrich Leuchtmann, a currency strategist at Commerzbank in Frankfurt.
Against the dollar, the British currency sank 0.8 percent to $1.2855 while there were bigger losses against the euro with sterling on track to post its biggest daily drop in more than three months.
The pound recovered partially in late London afternoon trading, with U.S. markets closed for a holiday.
The EU’s Barnier told a German newspaper on Sunday that he strongly opposed Britain’s latest proposal.
The British currency was the weakest among the major currencies with U.S. markets shut for a holiday, and it is set to fall for a third consecutive day.
Derivative markets were flashing amber with implied gauges of market volatility jumping to a six-month high as investors grow wary about the prospects of a deal.
The hard Brexit ‘cliff’
“With Brexit negotiations between the UK and the EU in full swing, the potential ‘cliff’ of a hard-Brexit has come more clearly into focus,” UBS strategists said in a note.
Latest data indicates investors have ramped up their short positions on the British currency, with overall net short bets reaching their highest level since early May 2017.
Economic data provided no relief. British manufacturers had their weakest month in over two years and export orders suffered a rare decline in August, a survey showed.
“Weak economic data and bearish political background means this is a double-pronged attack on sterling,” said Neil Jones, Mizuho Bank’s head of hedge fund sales based in London.