SINGAPORE (BLOOMBERG) - The pound slumped on Tuesday (Dec 17) following reports UK Prime Minister Boris Johnson plans to change the law to guarantee the Brexit phase isn't extended beyond the end of next year, increasing the threat of a chaotic no-deal divorce or "hard" Brexit.
Against the Singapore dollar, the pound weakened 0.86 per cent to $1.7979 as at 3:11pm, from its previous day's close of $1.8114. The pound is still up 3.5 per cent to the Singdollar to date this year.
The British currency had jumped as high as $1.8293 last Friday as the Mr Johnson's Conservative Party swept to victory with a large majority in the UK general election, fueling optimism there would be a speedy resolution to the Brexit deadlock.
The pound also fell as much as 0.7 per cent against the US dollar to US$1.3236 on Tuesday before paring its losses to trade 0.2 per cent down at US$1.3301.
Johnson's planned legislation will include legal text to prevent the government from delaying the day Britain stops being subject to EU laws, even if no new trade terms have been secured in time, an official said.
"The honeymoon of the election is now over and the risks of a potential hard Brexit have been brought forward," said Kyle Rodda, analyst at IG Markets in Melbourne. "Johnson is taking an assertive stance on Brexit and although a hard divorce may still be in the margins for now, there are increasing risk premiums priced into the pound."
A Citigroup index indicated currency funds have almost completely unwound their bearish bets on sterling. Asset managers have also switched to a net long position position from a net short before the vote, data from the Commodity Futures Trading Commission showed.
Investors are "feeling nervous about whether Johnson can reach a trade agreement with the EU by the end of next year," said Kumiko Ishikawa, currency analyst at Sony Financial in Tokyo. "If the scope is dimming for further upside to the pound, there's little choice but to take profits on the rally so far."
With additional information from The Straits Times