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(Bloomberg) -- The pound dropped the most in a week as U.K. Prime Minister Theresa May faced fresh challenges to her leadership and the European Union cast doubt on the prospect of a December Brexit deal.

Leveraged accounts sold the currency after the Sunday Times said 40 Conservative members of Parliament, nearly enough to a leadership challenge, have agreed to sign a letter of no confidence. Sterling fell against all of its Group-of-10 peers after European Union chief negotiator Michel Barnier on Friday raised the prospect of Brexit talks failing to reach a breakthrough by year-end, saying the U.K. has two weeks to come up with a better offer.

“None of this can do the pound any good,” said Gareth Berry, a foreign-exchange and rates strategist at Macquarie Bank Ltd. in Singapore. “The Bank of England has already delivered the ‘one-and-done’ hike. So with no good monetary policy news left to look forward to, the political backdrop is likely to dominate in the months ahead.”

A measure of the pound’s implied volatility rose to the highest in almost two weeks as traders braced for a string of Bank of England speeches and data that includes inflation, the labor market and retail sales. Foreign Secretary Boris Johnson and Environment Secretary Michael Grove have sent a letter to May designed to push her to a hard Brexit, the Guardian reported.

  • GBP/USD slides 0.7% to 1.3103 after declining as much as 0.8% Macro sentiment is also bearish, but most aren’t chasing spot lower and prefer to leave offers at 1.3180-1.3200, Asia-based FX trader says Labour Party says May should work with the opposition to pave way for a Brexit transition given lack of support within her own party “Brexit risks and the stability of the government have pushed to the top of the list of priorities as far the FX outlook is concerned,” Macquarie’s Berry says 1-month implied volatility for GBP/USD rose as much as 0.58 to 7.69, highest since Nov. 2
  • BBDXY rises 0.1%, Treasury 10-year yield falls 2bps to 2.38%
  • Fed Bank of Philadelphia President Harker says he’s looking for another rate increase this year and the balance-sheet unwind will be “boring” “With a labor market this tight, inflation is likely to reassert itself at some point,” he says in text of speech in Tokyo
  • AUD/USD little changed at 0.7663; pair earlier slipped 0.3% after RBA Deputy Governor Debelle plays down expectations for a rate increase without a stronger economy
  • NZD/USD falls 0.1% to 0.6933 as short-term accounts were said to short the pair on reports of division within the Labour coalition over a revised Trans-Pacific Partnership 
  • Some information comes from traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly

--With assistance from Hooyeon Kim and Michael G. Wilson

To contact the reporter on this story: Netty Ismail in Singapore at nismail3@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds

©2017 Bloomberg L.P.

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