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Pound Weakens on Political Discord Ahead of Brexit Negotiations

The pound fell from a 10-month high against the dollar on concern that discord within the U.K. government is worsening before the nation starts the second round of Brexit negotiations with the European Union.

Sterling snapped a three-day advance ahead of the talks that are likely to focus on protecting citizens’ rights, which has been a key sticking point so far. Chancellor of the Exchequer Philip Hammond exposed tensions within the British cabinet at the weekend by stating that transitional arrangements at the end of talks are likely to last a couple of years, far longer than the couple of months suggested by Trade Secretary Liam Fox.

The currency rallied last week on more hawkish rhetoric from the Bank of England and weaker-than-expected U.S. inflation data. Any divisions within Prime Minister Theresa May’s government could make it difficult to secure a good deal with the EU, while also posing a risk that her weakened mandate could crumble, forcing new elections.

“We’re seeing the division at cabinet level laid increasingly bare,” said Ned Rumpeltin, head of currency strategy at The Toronto Dominion Bank in London, who sees the pound falling to $1.26 by the end of this quarter. This will “will be a factor for sterling all the way through the Brexit process, for as long as the current government stays in power.”

GBP/USD -0.2% to 1.3066 after rising as high as 1.3117, strongest since September; EUR/GBP -0.16% at 0.8768
Support for cable at 1.3049, daily pivot; resistance at 1.3163-80, pivot r1, Sept. 15 low
“The situation remains difficult for sterling,” Commerzbank analysts led by Frankfurt-based Thu Lan Nguyen write in note
“It may not be a breakdown of the Brexit negotiations, but a breakdown of the British government which is the biggest risk for sterling”
U.K. appears more willing to make concessions with the EU on issues such as whether Britain will meet its financial obligations to the bloc, Nguyen writes
Inflation and retail sales the key data this week
“While it cannot be excluded that positive incoming data is making a case of even further rising central bank rate expectations to the benefit of the GBP, we believe that upside from the current levels is likely to prove limited,” Credit Agricole analysts Manuel Oliveri and Vassili Serebriakov write
U.K. house prices “virtually at a standstill”, Rightmove Plc says; asking prices rose 0.1% in July from the previous month, according to the property website
Yield on 10-year gilts falls 3bps to 1.28%
Source: Bloomberg

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