Pound drops from three-month high as doubts arise on Brexit deal

The pound slid from near a three-month high after European negotiators warned U.K. Prime Minister Boris Johnson’s plans were not yet good enough to form the basis of a divorce deal.

Sterling dropped as much as 0.6% against the dollar after surging 3.8% during the previous two days amid optimism the two sides would reach an agreement to avoid a no-deal outcome. EU’s chief Brexit negotiator Michel Barnier told envoys on Sunday that Johnson’s proposals for breaking the Irish border deadlock risked leaving the single market vulnerable to fraud, officials said.

“There’s some realization perhaps that there’s still a lot of uncertainty around Brexit despite the positive developments last week,” said Janu Chan, senior economist at St. George Bank in Sydney. “We’re bracing for quite a bit of uncertainty and volatility over the short-term for the pound.”

The pound was 0.6% weaker at $1.2597 as of 7:08 a.m. in London after climbing to $1.2707 on Friday. The currency has tumbled about 15% since the day before the Brexit referendum in June 2016 and touched a three-year low of $1.1959 last month.

Talks are due to continue in Brussels on Monday. Negotiators are now in a race against time to reach an accord for EU leaders to endorse at a summit that starts on Thursday.

“We should know today or tomorrow whether it’s going to be possible to have a deal together before the EU Leaders’ Summit at the end of the week,” TD Securities’ strategists including Richard Kelly in London, wrote in a note. “Boris Johnson has a very tough balancing act ahead in trying to keep the Democratic Unionist Party onside, but also come up with something that works for the EU.”

The so-called “tunnel” negotiations between the U.K. and the EU over Brexit could sustain the pound’s rally, according to Goldman Sachs Group Inc. The world’s best-performing currency of last week might strengthen another 2.6%, the Wall Street bank said in a note to clients on Friday.