LONDON: The pound was steady in early trading on Monday, lagging behind other risk-related currencies, as investors focused on talks over post-Brexit trade arrangements for Northern Ireland, ahead of market data later in the week.
Relations between Brussels and London have deteriorated in recent weeks after Britain, unhappy with the Brexit deal it signed up to in 2020, threatened to trigger an emergency clause known as Article 16 of the Northern Ireland Protocol, potentially leading to a trade war.
Britain and the EU will intensify their efforts to break the impasse this week, the European Commission's Maros Sefcovic said.
Analysts were split over how much impact the Brexit tensions were having on the pound.
At 0852 GMT, the pound was flat on the day versus the dollar, at $1.341, lagging behind other major currencies which were benefiting from a "risk-on" mood in FX markets more broadly.
Versus the euro, it was also flat, at 85.325 pence per euro .
Weekly CFTC positioning data showed that speculators are overall bullish on the pound versus the dollar, and that in the week to Nov 9 the size of this net long position remained close to that of the week before.
"The FX market has still been quite reluctant to price in any Brexit-related risk premium on GBP, despite multiple indications that the EU is planning to retaliate should the UK suspend parts of the NIP (Northern Ireland Protocol)," wrote ING strategists in a note to clients.
"Our moderately bullish bias on GBP for the remainder of the year is tied to the view that markets will continue to steer away from embedding much political risk into GBP."
But one-month risk reversals - a gauge of the market's expectations of the pound's direction - hit their lowest since December 2020 on Thursday last week. The gauge is in negative territory which indicates the market expects the pound to fall.
"The ever-falling level of the risk reversals suggests that the market is getting increasingly worried about the pound, which I suspect has something to do with the UK brinksmanship around Article 16," Marshall Gittler, head of investment research at BDSwiss Group, said in a client note.
In the week ahead, markets will be focused on the UK jobs report on Tuesday and CPI data on Wednesday.
Surprisingly high U.S. inflation data boosted the dollar to 16-month highs last week, prompting traders to raise their bets on a U.S. rate hike as early as mid-2022
The Bank of England will be the first major central bank to raise interest rates but whether that initial increase comes as soon as next month or if it waits until early next year has divided economists polled by Reuters.
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