Sterling hit its lowest point against the US dollar since mid-January this afternoon after the EU's chief Brexit negotiator, Michel Barnier, said a transition deal is not yet guaranteed.
The pound briefly dipped below the $1.38 mark in afternoon trading before recovering slightly, although it remained down by 0.6 per cent for the day. The fall against the euro was even more pronounced, with a 0.77 per cent loss.
Barnier today said that a Brexit transition period is "not a given", with three "substantial" disagreements remaining, including the status of newly arrived EU citizens after March 2019, the UK's say in EU laws, and justice and home affairs issues.
Read more: Barnier: Future financial services trade must "respect EU regulatory autonomy"
British business groups have uniformly called for a transitional deal to be agreed as soon as possible, with fears that cross-border trade could grind to a halt between the UK and the EU after March 2019 if no agreement is reached.
The comments wiped out the rise as high as $1.40 made by sterling after Bank of England governor Mark Carney came out with a hawkish message about the future path of interest rates, suggesting they will rise earlier and faster than previously thought.
The move lower for sterling underlines that the biggest single risk facing the UK economy remains the Brexit process.
Read more: Bank of England signals markets to expect earlier interest rate hike
Jeremy Cook, chief economist at payments firm Worldfirst, said: “For sterling, nothing is more important in the short term than a transitional deal that extends the UK’s membership of the Single Market and customs union."
Barnier also said that checkpoints on the Irish border are "unavoidable" if the UK takes Northern Ireland out of the customs union. Prime Minister Theresa May has previously promised there will be no physical infrastructure on the Irish border whatsoever.
Hamish Muress, currency analyst at OFX, said: "With Brexit once again moving back onto the markets’ radar, risk of a sterling downturn has returned and even the Bank of England’s aggressive policy outlook hasn’t provided much support to the pound. It will be interesting to see how the markets respond to the EU summit towards the end of the month, and any news that leaks from it.”
Read more: Northern Ireland border checks are "unavoidable" after Brexit, says Barnier
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