LONDON (Reuters) - Sterling rallied by more than a percent to cross the $1.30 line for the first time in three weeks on Wednesday after the European Union’s chief Brexit negotiator signaled an accomodative stance towards the United Kingdom in ongoing talks.
Michel Barnier said the bloc was prepared to offer Britain an unprecedentedly close relationship after it quits the EU, but it would not permit anything that weakened the body’s single market.
His comments offered some relief to battered sterling bulls who have started pricing in the prospect of a no-deal Brexit in recent days, especially via the currency derivatives markets.
“I think people are viewing this as a sign that there’s going to be some sort of close-ish cooperation between the European Union and the UK after the UK leaves but this is a turning point,” said David Madden, markets analyst at CMC Markets.
The British currency rallied to its highest level since Aug. 3 against the dollar GBP=D3. It jumped more than a percent, its biggest daily rise in two months.
Against the euro EURGBP=D3, sterling extended gains to rise one percent on the day at 90 pence and pulling further back from a near one-year low hit in the previous session at nearly 91 pence.
“The EU has actually been relatively accomodating for quite a while now and these latest comments make it very hard for the UK government to keep blaming the EU for the risk of a no-deal,” said John Marley, a senior currency consultant at FX risk management specialist, SmartCurrencyBusiness.
While most FTSE 100 constituents fell as sterling gained, making exporters’ foreign currency revenue relatively smaller in pounds, a select few gained.
FTSE 350 food production firms .FTNMX3570 gained 0.8 percent.
The FTSE 350 real estate sector .FTUB8600 rose 0.4 percent as Britain's Brexit minister said a deal is "within our sights".
Still, the prospect of a no-deal Brexit has piled pressure on the British currency in recent days.
Foreign exchange analysts have forecast that the pound will weaken to $1.20 in the event of a no-deal Brexit, a Reuters poll found this month.
Also, Brexit minister Dominic Raab told legislators on Wednesday Britain could choose to withhold some payments to the European Union if a deal to ease its exit from the bloc is not reached before it leaves in March.
In currency derivatives markets, traders have slowly started to bet on sterling weakening against the euro, and large option expiries are building up around the 91-pence level.
Reporting by Saikat Chatterjee, Ritvik Carvalho and Helen Reid; editing by Andrei Khalip
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