The pound fell against the euro and the dollar on Thursday, after reports that the EU was poised to take legal action against the UK over its behaviour in Brexit negotiations.
European Council president Ursula von der Leyen was due to give a statement on the implementation of the Withdrawal Agreement between EU and UK on Thursday morning. Reports suggested von der Leyen would announce legal action against the UK over its Internal Markets Bill, which reneges on key parts of the Brexit Withdrawal Agreement.
This is the latest saga in the tense negotiations, leaving the currency in a delicate balance.
Britain’s threat to renege on parts of the Withdrawal Agreement as well as new proposals on limiting state subsidies to ailing British companies have been major sticking points.
But the UK should accept that the EU “isn’t bluffing” and “won’t compromise” when it comes to these points, said Ranko Berich, head of market analysis at Monex Europe.
“Boris Johnson will be seen as backing down or will need to spend some serious political capital” to achieve a deal, he added.
Even with Thursday’s announcement, sterling is likely to head 5% to 8% lower if both sides walk away from a deal, Berich said.