By Joice Alves
LONDON (Reuters) – The pound fell to a two-month low against a broadly strong euro on Friday ahead of a new round of Brexit talks next week, but it recovered a little against a weaker dollar.
Brexit talks about a trade deal with the European Union have not gone well, with the clock ticking on a transition period that runs out at the end of the year.
If next week’s round of negotiations between Britain and the EU shows no material progress, a no-deal scenario could be priced in and weigh on sterling, Swissquote senior analyst Ipek Ozkardeskaya said in a note to clients.
“The UK will start preparing for a no-deal divorce if we do not see material progress in talks next week,” Ozkardeskaya said.
While the Bank of England’s chief economist, Andy Haldane, said the central bank was not close to implementing negative interest rates, money markets are already pricing them in.
“We are most concerned with the UK,” Deutsche Bank said in a note. Negative rates “would be very negative for GBP as a current account deficit country”, it added.
A coronavirus-induced recession and growing debt are also holding down the pound.
Against a broadly strong euro, sterling lost 0.4% to 90.26 pence, reaching its weakest since March 27.
Sterling lost almost 4% against the euro this month, which gained support from the European Commission stimulus plan announced this week.
The euro also rose as data showed that inflation in the bloc continued to slow but underlying price growth held steady.
Against a weakening dollar, the pound gained 0.1% to $1.2332, with traders fearful that tensions between U.S. President Donald Trump and China could escalate.
Boris Johnson announced on Thursday that the coronavirus lockdown will ease next week, but the announcement has not been enough to lift the mood after Bank of England said Britain’s economy is unlikely to recover fully in the next two to three years.
British finance minister Rishi Sunak will tell employers on Friday that they must pay between 20% and 30% of the costs of the government’s expensive wage subsidy programme from August, according to media reports.
The country has the worst COVID-19 death toll in Europe.
(Reporting by Joice Alves; Editing by Larry King and David Goodman)