Pound at one-year highs but derivatives investors take cover on Brexit deal fears

LONDON (Reuters) - The British pound climbed to a one-year high near $1.35 on Thursday as a U.S. dollar selloff gathered momentum, but growing unease about a Brexit trade deal prompted investors to take protective action in the derivative markets.

FILE PHOTO: A British ten pound banknote is seen in a photo illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration

European Union negotiators have moved to “within millimetres” of the limits of their negotiating mandate at Brexit trade talks so it is up to London to compromise if a deal is to be reached, an EU diplomat said on Thursday.

But Prime Minister Boris Johnson’s government pushed ahead with two bills that would breach the 2020 Brexit treaty despite protests from Brussels.

“In such a case, a no-deal Brexit may become an even more realistic outcome and the currency could fall off the cliff,” said Charalambos Pissouros, a senior market analyst at JFD Group.

Negotiators were reportedly stuck on differences over fisheries, state aid for companies and rules to resolve disputes, offsetting any optimism from Britain becoming the world’s first country to approve the Pfizer-BioNTech COVID-19 vaccine.

“For the pound to rebound, we need to see headlines suggesting that the two sides have found some sort of common ground over their main differences, which are fisheries, governance, and level playing field,” Pissouros said.

In late London trading, the pound gained 0.9% to $1.3494, its highest level since Dec. 12, 2019, thanks to broad-based dollar weakness.

Versus the euro, the pound rose 0.4% to 90.22 pence.

But beneath the calm in the cash markets, derivative markets were signalling growing unease over the state of Brexit talks, with one-month risk reversals for the pound, a gauge of calls to puts for the currency, indicating rising numbers of bearish bets.

The ratio fell to 2.7 on Wednesday, levels last reached in April. It was trading around 0.9 two weeks earlier.

Gauges of expected price swings in the pound for one-month maturities climbed to a one-month high of nearly 11% from around 9% last month.

Reporting by Saikat Chatterjee; Editing by John Stonestreet, Paul Simao and Hugh Lawson