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Pound hops higher on Brexit mood music

Positive soundings from the European Union on Brexit talks helped lift the British pound on Wednesday above $1.35 and to its highest level against the dollar since May 2018.

The EU’s chief executive said on Wednesday she could not say if there would be a trade deal with Britain but there had been progress and the next few days would be critical.

Ursula von der Leyen said discussions on access to British fishing waters for EU vessels were “still very difficult” but negotiators had moved forward on the other most contentious element – guarantees of fair competition for companies.

Upbeat mood music on both sides around a possible Brexit deal before the year-end has helped the pound strengthen over 2% against the dollar this week.

On Tuesday, tweets from a BBC political reporter stating that Conservative Party lawmakers think that Britain is heading towards a deal with the EU supported the pound.

However, caution still shows in elevated implied volatility gauges, which imply traders buying protection against price swings in the currency.

Tempering some of the optimism were comments from a British official, who said both sides had made some progress in the trade talks but were still “very far apart in key areas”.

By 1415 GMT, sterling was up 0.4% at $1.3522 against the dollar, having earlier hit $1.3555, its highest level since May 2018. It rose above the $1.35 mark shortly after von der Leyen’s comments.

Against the euro, it gained 0.1% at 90.15 pence.

“Sterling traded Wednesday with a more positive sentiment, as the market began to price in a stronger chance of a Brexit deal now compared to late last week,” said Ian Tew, sterling trader at Barclays.

“From our view, the market is pricing 75% odds of the EU and UK coming to agreement.”

Tew added that Brexit had provided a clear catalyst for further performance for the pound against a weak dollar, but noted that on a trade-weighted basis, sterling was “still not that high”.

NO-DEAL WOULD BE “NEW CHAPTER”

Mikael Milhøj, senior analyst at Danske Bank said the pound would remain volatile in the near-term until further clarification on the talks is received.

ING’s global head of markets, Chris Turner, said in a podcast that thin December markets could add to the risk of outsized moves in the currency, while noting that very little risk premium was priced in, making downside risk greater.

A no-deal Brexit would mean a risk of Britain entering sub-zero interest rate territory, he said.

“Were there to be a no-deal, it would bring back the risk of negative interest rates from the Bank of England, and crossing into negative territory – that I think takes us into a new chapter for sterling,” Turner said.

The Bank of England is consulting with lenders to see what preparations they need to make if the central bank were to cut interest rates to negative levels to help the economy, badly hit by the COVID-19 pandemic.

BoE Governor Andrew Bailey has stressed that no decision has been taken on negative rates.
Source: Reuters (Reporting by Ritvik Carvalho; additional reporting by Carolyn Cohn in LONDON; Editing by Giles Elgood and Gareth Jones)

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