LONDON • The pound fell after UK Prime Minister Boris Johnson ratcheted up the chances of trade negotiations failing with the European Union (EU).

Sterling declined as much as 0.6 per cent against the US dollar, extending its drop to the longest since June, as Mr Johnson prepared to tell the EU he's willing to let talks fail, rather than compromise on what he sees as core Brexit principles.

"It looks that we are only at the beginning of a painful correction lower in the pound," said Mr Valentin Marinov, head of Group-of-10 foreign-exchange strategy at Credit Agricole, who sees the pound dropping to US$1.20 in the event of no deal.

The cost of hedging against swings in the pound out to six months is at the highest level since at least July, with the three-month tenor covering the US election as well as Brexit developments.

There is little sign of increased investor concern among risk reversals, gauges of market positioning and sentiment, which are at their least bearish since March and largely unchanged following yesterday's news.

Talks between the two sides are set to continue this week. The UK currency had touched the highest level this year last week amid broader weakness in the dollar.

Investors are refocusing on Brexit with the two sides accepting they need to reach a deal by next month to pave the way for a smooth exit at the end of the year, when the Brexit transition period ends. A so-called cliff-edge departure could add to the economic strain on the United Kingdom from the coronavirus.

JPMorgan Chase & Co strategists recommend a traditional bond-market hedge against a chaotic Brexit. They suggest selling 10-year Irish debt, which would suffer given Ireland's close trading relations with the UK, and buying French bonds instead.

"Our economist's assessment remains that the chance of no-deal is about a third, but with brinksmanship part of the process, it may appear higher than that in coming weeks before agreement is reached," strategists including Mr Aditya Chordia wrote in a client note.

By 1015 GMT, the currency was down 1 per cent at US$1.3145, its lowest level since Aug 26, while against the euro, it touched a low of 89.90 pence.

Yesterday's news on Brexit "is the cherry on top of the cake" for the beleagured UK currency, said currency analyst Jordan Rochester at Nomura. He expects the British pound to continue falling against the euro ahead of an EU summit due in the middle of next month.

BLOOMBERG, REUTERS