Pound rises on renewed hopes for Brexit trade deal - Financial Times

Sterling rose in early Asia trading on Monday after the EU and UK decided to “go the extra mile” and continue Brexit trade negotiations. 

The pound climbed around 1 per cent as trading got under way in Australia and New Zealand to $1.3367. It advanced by 0.8 per cent against the euro to €1.1007. 

Monday’s gains partially reversed last week’s 1.6 per cent fall, which was triggered by warnings from EU and UK leaders that Britain could leave the bloc without a trade deal when the Brexit transition period concludes at the end of this year. Trading volumes are typically light for European currencies early in the Asian morning, however the gains point to a recovery in sentiment after last week’s wobble. 

Boris Johnson, UK prime minister, and Ursula von der Leyen, European Commission president, agreed in a “constructive” call on Sunday to “go the extra mile” in an attempt to break the deadlock, as both sides reported progress. Still, no deadline was set for negotiations and British officials admitted they could drag on until Christmas. 

Goldman Sachs said on Sunday it expected sterling to rise up to 2 per cent against the euro on “the apparent progress towards a deal — or at least avoiding a no-deal outcome for now”.

Barclays analysts cautioned, however, that negative risks to the pound will persist until negotiators reach an agreement. If the EU and UK make a deal, the currency could trade above $1.35, the bank said. In the case of a no-deal outcome, Barclays expects the pound to drop to around $1.25.

“A deal narrowly remains our base case and . . . we expect the pound to bounce ultimately,” strategists at the UK bank said.

Gregory Perdon, co-chief investment officer at Arbuthnot Latham, said he had “second thoughts” late last week about his bet that sterling would rise. However, he decided to stick to his “conviction” since “both parties are probably better off economically with a deal”.

“Let’s hope rationality wins in this instance,” he said. 

Sterling’s gains on Monday come ahead of this Thursday’s Bank of England meeting. Economists broadly expect the central bank to hold steady on policy after it boosted its bond-buying programme by £150bn at its November meeting. 

Bank of America said Brexit news remained the potential near-term catalyst for a change at the BoE and “if markets became jittery the BoE could increase the QE purchase pace at short notice”. 

Measures of expected volatility in sterling over the next month remain elevated, signalling heightened market expectations for tumult in the pound as 2020 nears its end.

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2020-12-13 21:42:00Z
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