The pound came under pressure and UK banking stocks were sold off in volatile trading on Friday as fears of a no-deal Brexit intensified.
Sterling dipped by nearly two cents to just above $1.31 against the US dollar- a four-week low.
It was down by more than a cent versus the euro at a little above €1.08, its lowest level for nearly three months.
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No-deal Brexit ‘looking very, very likely’
Britain’s currency had been climbing until this month, when it topped $1.35 against the dollar for the first time in nearly a year.
But it has turned lower over the last week as fears of a no-deal Brexit grow.
Ahead of Sunday’s deadline for a decision on the negotiations, Boris Johnson has said it was “looking very, very likely” that the UK would complete its departure from the bloc without an agreement.
By the end of Friday afternoon the pound had clawed back some of its losses, but was still a cent down against the dollar at $1.32 and half a cent off versus the euro at €1.09.
In stock markets, banks were hit hard, with NatWest down 6.7%, Lloyds off 4.5% and Barclays 4% lower while HSBC – less exposed to the UK than some of its rivals – fell 0.6%.
The wider FTSE 100 was down by 0.8%, cushioned from bigger losses by its foreign currency earning multinationals which tend to benefit from a weaker pound.
It came as the Bank of England warned of a bumpy ride ahead for markets as the Brexit transition comes to an end.
AJ Bell investment director Russ Mould said: “A no-deal Brexit is starting to be factored in by the markets after Boris Johnson warned the country to prepare for such an outcome with sterling coming under renewed pressure.
“It remains hard to determine how much of this is the usual brinkmanship around negotiations – EU agreements often go right to the wire after all.
“Ultimately we’ll only really know for sure when both sides stop negotiating – with some apparent wiggle room over the latest ‘deadline’ set for Sunday.
“The fall in the pound isn’t lifting the FTSE 100 for once.
“That decline in index is down to mixed trading in Asia and weakness across Europe. For all the focus on Brexit, COVID hasn’t gone anywhere either and there has been some slightly less positive news on vaccines of late.”
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Thu Lan Nguyen, a currency analyst at Commerzbank, said the market may “price in a no-deal in the next few days”, averting a serious crash in the pound when the deadline for the trade talks passes.
“But it is also possible that the market will hold on to the hope of a last-second agreement and then be surprised by a no-deal, which would lead to major market turbulence,” she said.
While banks and bookmakers have slashed the chances of a deal, many investors believe London and Brussels will reach a last-minute agreement and the drops in sterling have not been as large as in the run-up to earlier Brexit deadlines.