Sterling rose slightly on Friday but was still on track to end the week on a loss, as markets waited for Britain to say whether it would continue with Brexit negotiations after the European Union leaders’ summit left the UK disappointed.
Britain left the European Union in January. Since then, both sides have been locked in negotiations to try and reach a trade deal before the status-quo transition period ends on Dec. 31.
British Prime Minister Boris Johnson will set out his approach to Brexit later on Friday. He had previously set Oct. 15 as a deadline after which the UK would quit negotiations if a deal had not been reached.
“There are so many conflicting signals coming from Brussels it is hard to conclude what the ‘mood music’ is. But it’s probably true to say the ‘mood music’ soured a little yesterday,” MUFG’s head of research, Derek Halpenny, wrote in a note to clients.
He said that the negotiations will probably continue, because the UK’s cut-off deadline was self-imposed.
“We see GBP price action as consistent with a reasonable degree of hope on a deal being done,” Halpenny added.
At 0752 GMT, the pound was up 0.2% on the day versus the dollar, at $1.2930, but set to end the week down 0.9%.
Versus the euro, it was up around 0.1% at 90.66 pence per euro.
British Foreign Secretary Dominic Raab said the EU was demanding that the UK make all of the compromises. He also said that both sides were “close” to a deal.
But Germany’s Europe minister said that no progress has been made on the main topics. The EU’s chief negotiator said that the bloc’s national leaders want a deal, but not at any cost.
The main areas of contention are: fair competition, dispute resolution and fisheries, with France taking a particularly hardline on the latter.
ING strategists said a Johnson announcement that he would not quit the talks might lift the pound slightly, but that the risk remains to the downside.
The possibility of negative rates is also weighing on sterling and analysts say this as linked to the Brexit situation because the Bank of England would be more likely to slash rates if the UK’s economy deteriorates after a no-deal outcome.
London will enter a new level of COVID-19 lockdown from midnight on Friday, meaning different households cannot mix indoors.
Reporting by Elizabeth Howcroft; Editing by Mark Heinrich