Sterling touched $1.34 against the dollar on Monday, extending gains of more than 1%, after Britain and the European Union extended discussions on a post-Brexit trade deal beyond Sunday’s deadline.
British Prime Minister Boris Johnson and Ursula von der Leyen, the president of the European Commission, told negotiators to continue talks beyond Sunday to resolve an impasse on arrangements that would guarantee British access to the EU’s single market.
The EU’s Brexit negotiator, Michel Barnier, said a new trade pact with Britain was still possible as negotiators sought to break deadlocks on access to UK fishing waters for EU vessels and corporate economic fair-play rules.
British Business Secretary Alok Sharma told Sky News on Monday that while Britain and the EU are still apart in the talks, Johnson does not want to walk away yet.
By 0954 GMT, the pound traded 1.4% higher to the dollar at $1.3405, having hit the day’s high of $1.3411 earlier.
Against the euro, it was 1% higher at 90.63 pence per euro.
“The pound is obviously relieved that the trade talks will continue between the EU and the UK,” said Jane Foley, head of FX strategy at Rabobank.
“However, no tangible process has been confirmed over the weekend and the market is therefore likely to remain on tenter-hooks in the week ahead. Without confirmation that progress has been made, the pound’s gains are likely to be capped.”
The odds of Britain agreeing a trade deal with the EU before the end of a transition period have risen to 57% on Monday, up from 40% last week, according to punters betting on the Smarkets exchange.
Chances of no deal had risen to as much as 61% on Friday from 19% in late November after leaders failed to break an impasse in talks, according to the betting exchange.
Odds of no-deal on bookmaker Betfair had receded to 38% on Monday, down from 58% the previous day.
CAUTIOUS OPTIMISM AS DEADLINE APPROACHES
Investors also appeared cautiously optimistic on the chances of a deal, particularly as the end of the Brexit transition period on Dec. 31st draws closer.
“It comes as no surprise that the EU and the UK have allowed another self-imposed deadline to pass. Although there is little sign at this stage that the main sticking points are any closer to being resolved, we expect progress to be made as the only real deadline, 31 December, approaches,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a note to clients.
“In our view, a deal is still more likely than not, but with each day that passes, the risk of a no-deal outcome grows.”
UBS added that the announcement of an agreement could push sterling to $1.35, while increasing uncertainty about a no-deal outcome could lead it to revisit September lows around $1.28.
ING’s currency strategists said they expected a pound rally to materialize in the next two weeks, with a deal still being the most likely scenario.
“Still, the currency reaction function is asymmetrically skewed to the downside as, despite last week’s drop, sterling is still pricing in a good probability of a deal,” they said.
CFTC positioning data showed that speculators flipped to a net long position on the pound in the week up to last Tuesday. [IMM/FX]
Goldman Sachs economists said “significant sticking points” remained, but their base case is still a thin free trade agreement being reached before the end of the year, which would ensure continued free trade in goods but entail barriers for trade in services.
Economists at Citi said that even if a deal is agreed over the coming days, “persistent acrimony remains likely”, which would weigh on the medium-term outlook, and said a Canada-style deal with the EU is now the best possible outcome.
Reporting by Ritvik Carvalho; editing by Giles Elgood, Larry King