The pound on Wednesday staged the biggest rally since March on a thawing of the impasse in Brexit talks between the UK and Brussels.
Sterling gained steadily through Wednesday, helped by EU chief negotiator Michel Barnier’s comments that a trade deal between the UK and the bloc was “within reach” if both sides were prepared to compromise. A statement from the UK indicating Number 10 was prepared to begin “intensive talks” added more fuel to the rally.
The signs of potential progress mark a turnround from late last week, when prime minister Boris Johnson warned that the UK was prepared to walk away without a deal unless the EU showed a “fundamental change of approach”.
“It looks like whatever concessions have been offered by the EU have unblocked the talks again,” said Lee Hardman, a currency analyst at MUFG. “That gives the market more confidence that what we heard last week was just political posturing.”
Sterling climbed 1.7 per cent against the dollar to trade at more than $1.31 for the first time since early September, helped by a broad weakening of the US currency as Democrats and Republicans inched closer to a fiscal stimulus package. Against the euro, the pound was up 1.2 per cent at €1.108, its highest in a week.
Adding fuel to the rally were comments from Dave Ramsden, deputy governor for markets and banking at the Bank of England, who said now was not the “right time” for negative interest rates in the UK. BoE governor Andrew Bailey has repeatedly stated that sub-zero rates are in the central bank’s “toolbox”, while stressing that the contentious policy was not imminent. Even so, markets have priced in a significant probability of rate cut into negative territory next year.
A recent flare-up in Brexit tensions has weighed down on sterling, although the currency quickly shrugged off Mr Johnson’s “no-deal” warning last week. Most investors expect more volatility before the year-end deadline for a deal.
Paul Jackson, global head of asset allocation research at Invesco, said there were a wide range of outcomes for the pound, depending on whether the UK could strike a new free trade agreement with Brussels or revert to trading on terms set by the World Trade Organization.
“I’ve got sterling on about $1.20 if we move to WTO terms, $1.40 if we get something close to what we have,” Mr Jackson said. He added that large intraday swings in sterling were driven by “extreme uncertainty. On days like today you get a bit of optimism so it goes to the upside, tomorrow we may get our hopes dashed and it will fall quite sharply again.”