Sterling hit by Barnier's gloomy view on Brexit talks

By Olga Cotaga

Sterling fell on Thursday after the European Union's chief Brexit negotiator said that the UK had shown no willingness to break the deadlock on talks over a new trade agreement.

Speaking after this week's round of negotiations in London, Michel Barnier said there has been no progress at all on the question of ensuring fairness on state aid.

"Sterling's slump after Michel Barnier's comments should come as no surprise as headlines reinforce how far both sides are away from a comprehensive free trade agreement," said Simon Harvey, currency analyst at broker Monex Europe.

"The game of brinkmanship is likely to continue throughout Q3 and into Q4 in our opinion, resulting in only one certainty: an increase in sterling volatility to levels seen previously when the risk of a hard Brexit increased."

The pound was down 0.3% at $1.2605 <GBP=D3> and at 91.06 pence against the euro <EURGBP=D3>.

Overnight implied volatility gauges were elevated in the early European trading session, suggesting traders were nervous about emerging Brexit headlines on the last day of Brexit negotiations for the summer. Volatility levels earlier edged to a one-month high of 8.85%. <GBPONO=FN>

Leveraged funds were shorting the British currency up to July 14, though they have cut their positions in the past few weeks to hold a little more than $1 billion in shorts, the latest CFTC data shows. <GBPNETUSD=>

Graphic - Overnight vols rise to 1-month high - https://fingfx.thomsonreuters.com/gfx/mkt/dgkpldwbwpb/Overnight%20vols%20rise%20to%201-month%20high.png In other news, Bank of England interest rate setter Jonathan Haskel said he was worried that Britain's economic recovery from the coronavirus crisis could be slow, signalling his willingness to support more stimulus.

(Reporting by Olga Cotaga; Editing by Angus MacSwan and David Goodman)