Sterling blasts past $1.26 as EU leaders welcome Brexit deal progress
Sterling rose by over one per cent today to smash past $1.26 as EU leaders welcomed signs that the Brexit talks deadlock could finally break.
The British pound climbed 1.8 per cent to $1.267 against the dollar as both European Council president Donald Tusk and EU chief negotiator Michel Barnier reacted positively to talks between the UK and Ireland.
Read more: Brexit talks gather pace as Boris Johnson eyes 31 October departure
The EU Commission said a meeting between Barnier and the UK’s Brexit secretary, Stephen Barclay, was “constructive”.
Meanwhile European Council president Donald Tusk said he had received “promising signals” from Ireland.
Barnier is currently deciding whether there is enough on the table to justify intense Brexit negotiations ahead of an EU summit later this month.
Yesterday sterling rose almost two per cent yesterday after Prime Minister Boris Johnson and Irish Taoiseach Leo Varadkar found “a pathway to a possible deal”.
The pair had been discussing British proposals to replace the Irish backstop.
“Speculation in the last 24 hours about the possibility of a Brexit deal has prompted sterling to rally against the US dollar, nearing the highs it reached in September after the passage of the Benn Act,” Dean Turner at UBS Wealth Management said.
“The news will have cheered sterling investors, but we recommend they remain nimble with much still uncertain as the sand in the Brexit hourglass continues to run down.”
Today the pound’s rise continued despite a rollercoaster morning of trading.
First GBP hit $1.2502 at 9.42am before Tusk warned that “time is practically up” for the UK to get a Brexit deal across the line to meet the 31 October departure date.
That sent the pound falling to stand 0.32 per cent up against the dollar at 1.248.
GBP then spiked at $1.2524 at 10.08am as Tusk welcomed “promising signals” of progress on the complex issue of the Irish backstop.
Sterling is currently holding at $1.267, up 1.8 per cent against the dollar.
Tusk welcomed signals that Ireland and the UK have closed the gap on the controversial Irish backstop.
He said: “There is no guarantee of success and the time is practically up. But even the slightest chance must be used.
“A week ago I told PM Johnson that if there was no such proposal by today, I would announce publicly that there are no more chances – because of objective reasons – for a deal during the incoming European Council.
“However, yesterday when the Irish Taoiseach and the UK Prime Minister met they both saw – for the first time – a pathway to a deal.
“I have received promising signals from the Taoiseach that a deal is still possible. Technical talks are taking place in Brussels as we speak.”
In contrast, the FTSE 100 was flat at 7,187.9 points as the strength in the pound pushed exporters down but lifted UK banks and housebuilders.
“The FTSE 100 is weighed down by strength in sterling as optimism builds that Boris Johnson may, after all, secure a Brexit deal,” said AJ Bell investment director Russ Mould.
“This outweighed encouraging signs in the other big drama over trade, as Donald Trump hailed a ‘very, very good’ first day of negotiations with China in Washington. Overall this left the index of leading UK shares flat on Friday morning.”
“Investors clearly think there is a much greater chance of a deal,” added Markets.com senior market analyst Neil Wilson.
But he warned the spike is “very exposed” to negative news on negotiations if they sour, citing the tight timeline for a deal by the end of the EU summit on 19 October.
“Parliament has to agree to [a deal] that the EU (Ireland) is happy with next Saturday at the latest or we have to extend,” Wilson pointed out. “If [Boris Johnson’s government] extend now they face electoral carnage at the next general election.
But he admitted that more signs of a Brexit deal would push the pound much higher than 1.25 against USD.
Read more: How Boris Johnson rekindled hopes of a Brexit breakthrough
“If a deal looks more likely in the coming days we would expect a big pump higher that blows out all the stops and resistance,” Wilson said.
Spreadbetter IG’s senior market analyst, Josh Mahony, warned the pound’s value will rise and fall on every major Brexit development.
“With the pound driving higher off the back of an optimistic tweet from Tusk, it is clear that GBP traders will find plenty of volatility given the raft of statements coming out from both sides,” Mahony predicted.
Turner added that a Brexit delay followed by a general election remains the most likely scenario over the coming weeks.
Read more: Prepare yourself for the likelihood of a 2019 UK General Election
“We would expect to see sterling trade between 1.25-1.29 against the US dollar [in that case],” Turner added.
“However the possibility of a deal has undoubtedly increased, which could further prolong sterling’s rally.
“Clarity will be key, as we await further details on what the Prime Minister has agreed (if anything) and whether it stands a fighting chance of getting through parliament.”
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