Sterling sags on doubts over PM Johnson's EU Brexit offer

• Johnson is expected to disclose his final Brexit offer to the European Union later and to make clear that if Brussels does not engage with the proposal.
• The pound jumped above $1.23 on Tuesday on the back of reports that the EU was open to considering a time-limited Irish border backstop.

LONDON: Sterling was weighed down on Wednesday by concerns that British Prime Minister Boris Johnson's proposal to replace the Irish border "backstop" will not seal an EU separation agreement.

Johnson is expected to disclose his final Brexit offer to the European Union later and to make clear that if Brussels does not engage with the proposal, Britain will not negotiate further and will leave on Oct. 31.

A senior British government official said: "The government is either going to be negotiating a new deal or working on no deal - nobody will work on delay."

A report in the Telegraph newspaper on Tuesday said Johnson was planning to propose leaving Northern Ireland in large parts of the EU single market until at least 2025, but take the province out of the EU customs union along with the rest of the United Kingdom.

The proposal would be aimed at replacing the so-called backstop -- an insurance policy to prevent the return of a hard border on the island of Ireland -- that has become the biggest hurdle to securing an agreement with Brussels.

Irish Foreign Minister Simon Coveney said the reported proposal would not provide the basis for a deal, adding that the proposal was "concerning".

The latest proposal, as reported by media, is "fundamentally flawed" and "won't fly", European Union diplomats and officials said, adding that another delay to Britain's departure is likely if is London's final offer.

Investors shared his scepticism, keeping the pound down 0.6pc at $1.2232. Against the euro, sterling was also lower by 0.4pc at 89.18 pence.

"I don't sense an agreement between the two sides," said Neil Jones, head of European hedge fund sales at Mizuho, adding that this would result in a weaker sterling.

The pound jumped above $1.23 on Tuesday on the back of reports that the EU was open to considering a time-limited Irish border backstop.

The currency then gave up most of the gains when the EU denied the report.

Johnson's proposal is for a time-limited trade arrangement and "this is the key reason the EU could reject the plan," said MUFG analysts in a note to clients.

"We don't see how they (the EU) would support this latest plan. It supports our view that risks remain skewed to the downside for the pound," the analysts said.

The uncertainty has left investors unwilling to trade the pound, going instead to the derivatives market to trade pound volatility.

"There is quite a lot of staying away from sterling," Mizuho's Jones said, adding he would be "looking to buy sterling volatility on dips."

One-month sterling/dollar implied volatility embedded in the options prices at 10.875 vols was close to the six-month high it reached last week.

Johnson has been firm that the Oct. 31 deadline will be met, but parliament has put roadblocks in his way - passing a law that requires the prime minister to request a Brexit delay if he fails to secure an acceptable deal at an EU summit on Oct. 17.

The law reinforced analysts' trust that Brexit will be delayed for the third time. JP Morgan raised on Tuesday the probability it attaches to a Brexit extension to 85pc from 60pc. It also saw a no-deal Brexit probability down to 10pc from 25pc.