Sterling has weakened against the U.S. dollar as escalating tensions between the U.K. and the EU are threatening any chances of a post-Brexit trade deal in the coming months. Sterling dropped about 0.5% against the USD in early European trading hours ahead of another round of trade talks between the U.K. and EU. There are two main issues threatening to derail the entire process: differences over state aid and fisheries. The prospects for a deal were dealt another blow overnight after news that the U.K. government is preparing to override previous agreements with the EU.
The possibility that both sides will not reach a deal is a problem for many exporters and could ultimately shake financial markets. U.K. and the EU agreed to give themselves some more time to develop new trade arrangements and avoid a sudden shock at their borders. The EU had previously said that October was the key moment to achieve new trade arrangements, so there would be time for the necessary legislative processes before implementation.