The pound slid on its first day of trading since Britain left the EU on Friday, as prime minister Boris Johnson looked set for a fresh showdown with Brussels over a Brexit trade deal.
With fresh negotiations set to begin next month, Johnson warned in a speech on Monday Britain could walk away if a free trade agreement cannot be reached.
Britain would then risk a significant rupture to economic and other ties with the EU when a transition period ends in December.
Many UK firms could be forced to trade with EU partners on World Trade Organization (WTO) rules, meaning significant new tariffs and other barriers.
It marked the biggest drop in a day for sterling against the dollar since mid-December.
Johnson and his ministers have struck a more hardline stance in recent days, paving the way for a much starker break with Brussels than planned under former prime minister Theresa May.
The prime minister set out his vision of a Canada-style free trade agreement, with hopes of no tariffs or quotas on trade in goods.
He said Britain did not want to remain tied to EU rules on everything from competition law to social, environmental, and employment protections.
While Johnson vowed Britain would keep “the highest standards,” his refusal to make binding commitments puts him on a collision course with Brussels.
The EU has repeatedly said Britain’s access to European markets will depend on its willingness to sign up to EU standards. European politicians and officials fear Britain could gain a competitive advantage from changing its rules to benefit UK firms.
Brussels’ chief negotiator Michel Barnier used his own speech on Monday to warn Britain would only receive an “exceptional offer” on trade terms if it committed to a “level playing field” on standards.
Barnier also warned even a “best-in-class” trade deal would not mean “business as usual.” UK-EU trade will face new hurdles including border checks, new paperwork and no more “passporting rights” that help UK financial firms trade in Europe, according to Barnier.
“Britain won’t align; the EU demands it,” said Neil Wilson, chief markets analyst at Markets.com. He said the scene was set for a “showdown” that brought new risks for the pound.
Johnson said UK officials would be prepared to walk away from talks if the sides cannot strike a deal. But the prime minister claimed the choice was “emphatically not ‘deal or no deal.’”
He said the decision was between an EU relationship like Canada’s or one like Australia’s, which has only limited agreements for specific sectors and trades otherwise on WTO rules. “In either case, I have no doubt that Britain will prosper mightily,” Johnson added.
But John Allan, president of the Confederation of British Industry (CBI), warned: “Talk of a bare bones deal could pause investment.”