The pound headed for its best week against the euro since 2017 on Friday, on speculation that the chances of a no-deal Brexit are receding.
Sterling has climbed nearly 2 per cent against both the common currency and dollar this week, ahead of voting next week on various amendments to Prime Minister Theresa May's Brexit plan. The latest leg-up on Friday followed a report on talks between May and Northern Ireland's Democratic Unionist Party and Thursday's dovish European Central Bank meeting. The Democratic Unionist Party, which voted against May's deal earlier this month, will back an amended version if it includes a time limit to an agreement to keep the Irish border open, according to the Sun newspaper.
With the European Union already having ruled out a time limit, sterling’s gains faded after trading started in London hours.
“The problem with the sterling bounce is that the story is predicated upon a deal that is currently not on the table,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce. “The EU currently demand that a backstop ‘insurance’ policy cannot be time limited.”
Still, the report raised optimism in the market that some compromise can be found that will bring May’s Northern Irish allies and Brexit-backing Conservatives on board, leading some investors to cut short positions, according to traders. The pound headed for a 1.9 per cent gain this week to 86.59 pence per euro, its best performance since September 2017.
Sterling has climbed 1.6 per cent on the week to $1.3082. While investors took the reports as positive, “the pound’s gains on this should be contained,” wrote Adam Cole, chief currency strategist at RBC Capital Markets. There is not enough detail on what kind of revised backstop insurance policy the DUP would be willing to support, while passing a revised deal would rule out the most pound-positive scenario of second referendum, he said. – Bloomberg
