Brexit Update: Germany's Merkel Informs British PM Johnson Deal 'Overwhelmingly Unlikely'

A No. 10 Downing Street source has said a Brexit deal is "essentially impossible" in the wake of a call between U.K. Prime Minister Boris Johnson and German Chancellor Angela Merkel, according to a Tuesday BBC report.

Johnson and Merkel spoke earlier about the proposals the British PM put forward to the EU — but according to the BBC's source, Merkel made clear a deal based on the proposals is "overwhelmingly unlikely." 

Yet there is "skepticism" within the EU that Merkel would have used such language, said the BBC's Adam Fleming. 

No-Deal Most Likely Outcome

"With very little common ground, there appears to be very little benefit in continuing to negotiate," Artur Baluszynski, head of research at Henderson Rowe, said in the wake of the Johnson-Merkel call. 

"A no deal is the most likely outcome; both sides will now focus their attention on a blame game and finding the culprit."

The pound sterling is selling off and became vulnerable to further declines after the report emerged concerning Johnson and Merkel.

The currency's fall is unsurprising, since the news "all but confirms" that a withdrawal agreement will not be reached before the Brexit date, said Andy Scott, associate director at JCRA. 

"The drop in sterling indicates that the small amount of optimism which existed for a deal by next week’s EU summit among some investors has faded."

Possible Extension?

Tuesday's reports presumably mean the government will have to request an extension, something the EU has said it will agree to, Scott said.

An extension would allow for a general election and a new government to decide the next steps, he said. 

"More telling is sterling’s implied volatility in the FX options market, which acts as a market gauge of expected movement in a currency’s price, has fallen for one month’s time, but increased for both three and six months. This suggests that traders expect less movement in sterling over the current Brexit date, and more in three and six months’ time." 

Price Action

The iShares MSCI United Kingdom Index EWU was down 1.24% at the time of publication, while the Vanguard FTSE Europe ETF VGK was down 1.09%. 

Related Links:

UK Supreme Court Rules Boris Johnson's Pre-Brexit Parliament Suspension Unlawful

'No End In Sight:' Boris Johnson's Brexit Prep Breaks The Pound, No-Deal Scenario Likely

U.K. government photo via Wikimedia.