The pound slipped slightly on Thursday, but held close to six-week highs it touched on the previous day after news that stalled Brexit negotiations were due to resume.
Sterling rose by as much as 1.7% versus the dollar on Wednesday after the European Union’s chief negotiator Michel Barnier said that an EU-UK deal was “within reach”, extending gains on news that trade talks would restart after halting abruptly last week.
“The pound reacted well to this new development, and while we’ve been here before on the optimism front, there is the distinct prospect that a pathway to some form of agreement is opening up,” said Michael Hewson, chief market analyst at CMC Markets UK, in a note to clients.
At 0756 GMT on Thursday the pound, which reached as high as $1.3177 on Wednesday, was at $1.3136, down around 0.1% on the day.
Versus the euro, it was little changed at 90.33 pence per euro, having strengthened to as much as 90.115 pence per euro in the previous session.
Britain left the EU in January and is currently in a status-quo transition period which ends on Dec. 31. Failure to strike a trade deal would mean commerce then being conducted on World Trade Organization rules that involve some tariffs and quotas.
Prime Minister Boris Johnson said last week that the trade talks were over and told businesses to get ready for a no-deal outcome - comments that caused sterling to fall initially but they were soon dismissed by market participants as brinkmanship.
“Market participants were never convinced by the political posturing as the pound held its ground, and they are now more convinced that both sides are heading towards a trade deal,” MUFG currency analyst Lee Hardman wrote.
Hardman said the British government was under increasing pressure to avoid a no-deal outcome because of the COVID-19 pandemic and also the possibility of Donald Trump losing November’s U.S. presidential election, which would undermine the outlook for a quick U.S.-UK trade deal.
Britain’s finance minister is due to unveil later on Thursday more support for business and workers hit by the pandemic.
Britain has Europe’s highest death toll from the virus and new infections are rising rapidly. More regional lockdowns have been introduced and the country’s main furlough scheme is due to end on Oct. 31.
Intensified trade talks between Britain and the EU will resume on Thursday afternoon.
Reporting by Elizabeth Howcroft; Editing by Gareth Jones