Sterling traded choppily ahead of a summit where EU leaders will discuss their future trade relationship with the UK and as coronavirus cases continued to climb rapidly across parts of Britain.
In early trading, the pound slipped 0.5 per cent against the dollar to $1.2869. By midday in London, however, a Bloomberg report suggesting the UK will stick with talks beyond an October 15 deadline sent it back up 0.1 per cent to around $1.2952.
Sterling declined 0.3 per cent against the euro to €1.0981, then moved 0.3 per cent higher to €1.1045.
London’s exporter-heavy FTSE 100 index tracked the pound’s swings, opening 0.5 per cent higher before moving 0.2 per cent lower.
At the EU summit starting on Thursday, European leaders are expected to forge their own negotiating plan with Britain, as the deadline for the UK leaving the bloc’s single market and customs union on December 31 looms.
“The more time goes on, the more likely it looks that no deal will happen,” said Peter Westaway, chief economist for Europe at Vanguard.
But he added that the difference between no deal and a basic trade deal, which meant zero tariffs or quotas but maintained supply chain disruptions, was “slight”.
Ian Tew, a sterling trader at Barclays, said that although the pound was highly sensitive to any hints of sentiment about Brexit, “the market is reacting and acknowledging the tail risk of a no deal”.
The “recent rhetoric and the no-deal phrase is being expressed quite frequently”, he added, raising concerns that “these talks lead to further negativity”.
Coronavirus cases have risen sharply in the UK, to a seven-day average of close to 15,000. The government’s policies to contain the virus are coming under increasing attack from the opposition Labour party, scientists and regional leaders.
In European equities, the region-wide Stoxx 600 gained 0.2 per cent, with travel and leisure stocks down more 0.7 per cent, reversing strong gains made in the sector last week.
European travel stocks, which closed out last week almost 9 per cent higher, had been buoyed by optimism about travel bouncing back once a coronavirus vaccine became available. That exuberance faded on Tuesday when two major drug companies, J&J and Eli Lilly, halted their trials of an experimental Covid-19 vaccine and therapy, respectively, because of safety concerns.
In debt markets, traders continued snapping up bonds issued by economically weaker eurozone nations, in the expectation that the European Central Bank would expand its scheme to buy the securities to bolster financial stability through the pandemic.
The yield on Italy’s 10-year bonds, which moves inversely to prices, hovered around a record low at 0.659 per cent. Greece’s 10-year bonds followed the same pattern, yielding 0.788 per cent.
On Tuesday, Italy for the first time issued bonds that pay buyers no interest. With eurozone consumer prices falling and coronavirus cases rising, investors are betting that the ECB will boost the size of its pandemic emergency purchase programme from its current €1.35tn in the coming months.