By Elizabeth Howcroft
LONDON (Reuters) - Worries about Brexit trade talks knocked the pound 1% lower on Monday, but investment banks continue to expect Britain and the European Union to reach a deal before the Dec. 31 deadline.
Stubborn differences still stand in the way of a deal before the current transition period expires, and some commentators say the two sides have at best 48 hours to avoid a disorderly parting of ways at the end of this month. Market nerves were evident in the currency as well as options markets.
But analysts and economists at a set of banks canvassed by Reuters throughout this year still see a deal as more likely than not; most respondents are in fact more upbeat about the chances of a deal since they were asked in September.
"The fact that the two sides are still at the table and are not resorting to a high-level blame game suggests that both sides want a deal and believe it can still happen," Berenberg economist Kallum Pickering said.
He puts the chance of a no-deal exit at 25%.
Rabobank's UK economist Stefan Koopan sees the probability at 30%, versus 60% in September.
"One of the golden rules of Brexit is that 'nothing is agreed until everything is agreed', so this deal/no-deal spinning is likely to go on until there's either an over-arching agreement or a complete breakdown," Koopan said.
One of the more pessimistic was Peter Dixon at Commerzbank (DE:CBKG), who assigned a 50:50 chance to either outcome. Even if agreement is reached, "whatever does come out of the negotiations will be a skinny trade deal – that's the best we're going to get", he predicted.
Dixon also said that, although the transition period ends on Dec. 31, there was a "non-zero" probability that implementation of the new rules would be delayed to give businesses more time to adjust.
For Standard Chartered (OTC:SCBFF)'s Sarah Hewin, the probability of a no-deal outcome is 30%, but she also sees a 20% chance the transition period will be extended, citing the UK government saying in June it wouldn't introduce full border checks until the second half of 2021.
Analysts highlight the Dec. 10-11 EU leaders' summit as a possible deadline for a deal to be reached, but Johnson's spokesman said Britain and the EU would continue negotiating for as long as the two sides have time available and London believes a deal is possible.
(Graphic: How likely is a no-deal Brexit? - https://graphics.reuters.com/BRITAIN-EU/xlbvgmrywvq/chart.png)