FX Focus: Sterling falls amid rising worries EU will adopt hard stance on Brexit

The pound hit a two-week high against the euro on Friday (21 October), before edging lower amid rising expectations that European Union policymakers could adopt a hard stance over Britain's negotiations to leave the 28-country bloc.

Having touched a week-high against the dollar on Wednesday, sterling fell 0.33% against the greenback, trading at $1.2212, and was largely flat against the euro, fetching €1.1211, after hitting a two-week high of €1.1250 earlier in the day.

French President Francois Hollande told Prime Minister Theresa May, who was in Brussels attending the first EU summit since the June referendum, to prepare for tough negotiations. The prospect of EU members adopting a hard line over Britain's exit process could deal a significant blow to the UK's economy.

The pound has plummeted 20% since Britain voted in favour of leaving the EU and the losses have been exacerbated over the last couple of weeks, after the PM floated the notion of a "hard Brexit", which would see Britain implement tighter controls over free trade and immigration.

The euro fell after European Central Bank President Mario Draghi said yesterday that an abrupt end the bank's quantitative easing (QE) programme was unlikely and that policymakers were yet to discuss reducing the size of the monthly asset purchases.

"His comments suggest QE will be extended beyond next March, with the discussion over the future scale of the programme likely to take place at the 8 December policy meeting when its updated economic forecasts are available," said Chris Saint, senior analyst at Hargreaves Lansdown currency service.

Elsewhere, the dollar's rally continued, with the greenback touching the highest level against the euro since March 2016 – when the ECB expanded its QE measures to the current pace of €80bn per month – and soaring to a six-year against the Chinese yuan.

The US currency was also sharply higher against its Canadian counterpart, gaining 0.45% to CAD$1.3290, but slid 0.19% against the yen to ¥103.76.

"The foundation for a powerful dollar rally is in place," said analysts at Morgan Stanley.

In many aspects, the dollar outlook is stronger than it was last year. Valuation has moderated and the market is expecting fewer hikes over the next 12 months than it did at this time last year."