Pound plunges after EU rejects May's Brexit plans

New York

STERLING plunged last Friday, driving the US dollar up, after fears rose that Britain would leave the European Union without a trade deal.

British Prime Minister Theresa May said on Friday that the European Union must supply an alternative Brexit proposal, saying talks had reached an impasse after the bloc's leaders had rejected her plans without fully explaining why.

The pound was down 1.44 per cent on Friday, set for its biggest daily loss since June 2017.

"Sterling bears are out in full force. They've pushed the pound quite aggressively down this morning," said Dean Popplewell, chief currency strategist at Oanda in Toronto, "and it looks like they want to push things further".

The pound's move strengthened the US dollar, which rebounded from early lows, but it was still on track for its biggest weekly drop since February as stronger equity markets and rising bond yields fuelled a rush to buy riskier assets. The dollar index rose 0.38 per cent on Friday to 94.255.

"On the back of (the pound's fall), it's interesting the dollar got a bit of a bid as well," said Mr Popplewell.

"The trade woes in the last 48 hours took a bit of a back seat and it did allow some of the risk takers to set their sights on some of the other G-7 currencies."

With trade war concerns receding and emerging market central banks led by Turkey taking measures to stabilise their currencies, investors pushed the euro just past the US$1.18 line for the first time in more than three months during the European session.

The US dollar's bounce, however, pulled the single currency back into the red, last at US$1.174.

The safe-haven bid into the US dollar has been bolstered by strong US economic data, boosting the value of the currency as trade tension between Washington and Beijing escalates. As the tariff talk has faded out of focus, traders have made classic risk-on moves.

Other safe-haven assets have also suffered, including the Japanese yen against which the US dollar has strengthened last week. On Friday, 112.62 yen bought one US dollar, the highest price since July 2018.

The market will be focused on the Federal Reserve's policymaking committee meeting this week, at which a hike in interest rates is expected by 93.8 per cent of traders, according to CME Group's FedWatch tool.

With the likelihood of a Fed hike almost fully priced in by the market, analysts at TD Securities suggest that might yield an "asymmetric response in the FX markets where the dollar weakens more on a dovish take than rallies on a hawkish one". REUTERS