Pound Rallies on Optimism That Brexit Trade Talks May Succeed

(Bloomberg) —

The pound surged the most in six months on speculation this week’s Brexit trade negotiations could deliver a breakthrough and shield Britain from a messy rupture from the European Union.

Sterling outperformed major currencies to rise as much as 1.4% to $1.2930, the biggest rise since late March, as investors digested a more conciliatory tone from officials on both sides.

“Sterling is benefiting into the start of the week from mildly positive tone ahead of Brexit negotiations,” said Jeremy Stretch, head of G-10 currency research at Canadian Imperial Bank of Commerce in London. “The general risk-on tone is also good for sterling.”

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Sterling outperforms peers on hopes for a Brexit deal

Read More: Brexit Talks Enter Key Week With Time and Trust Running Out

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Britain risks crashing out of the EU’s single market without a trade accord at year-end if a deal isn’t reached. The EU’s chief Brexit negotiator Michel Barnier and his British counterpart, David Frost, will hold a final round of scheduled discussions starting Tuesday.

If they make enough progress by Friday, they could embark on a two-week period of intense discussions — the so-called Brussels “tunnel” — to hammer out an accord in time for a summit of European Union leaders on Oct. 15.

A trade deal could push the pound up by nearly 2% to 0.89 pence per euro in October, whereas failure to reach agreement could send it down to 92 pence, said Jane Foley, head of foreign-exchange strategy at Rabobank in London. However, “even if there is a deal there are likely to be several gaps and this could cut short any relief rally,” she said.

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Brexit Boost

This week’s round of Brexit talks appear to be fueling optimism among hedge funds, according to a Europe-based trader. This is reflected by one-month bearish bets retreating from the highs they saw in mid-September.

The outlook for the pound has also improved after the European Union enabled banks to keep using London’s clearing houses next year, helping to avoid a cliff-edge scenario for financial services.

(Updates pricing, adds analysis from Rabobank, from second paragraph.)

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