Sterling gains 1% vs euro on Brexit, vaccine hopes

LONDON (Reuters) - Hopes that a coronavirus vaccine would put the British economy back on track pushed the pound 1% higher versus the euro on Tuesday.

FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration

Comments from UK government officials that a deal was imminent on a post-Brexit trade agreement with the European Union also boosted sterling, feeding hopes for a deal by year end.

The pound was last trading at 89.20 pence against the common currency, having hit a two-month high of 88.85 pence, making it 1% stronger. Any rise above 88.66 pence would take it to a five-month or six-month high.

Sterling also extended gains versus the U.S. dollar, trading last up 0.6% on the day at $1.3242, having touched a two-month high of $1.3278.

Traders shrugged off a report that British employers made a record number of staff redundant in the third quarter. Brexit optimism added to growing appetite for riskier assets after Pfizer and BioNTech on Monday announced a promising coronavirus vaccine.

Echoing comments by Prime Minister Boris Johnson, British finance minister Rishi Sunak said on Monday that Britain and the EU have made progress in talks about a trade agreement and a deal can be done.

He also said the government was unilaterally setting out how it would let European Union financial services operate in Britain after a post-Brexit transition period ends on Dec. 31.

Sterling could go as high as $1.40 by the end of the year if Britain and the EU agree on a trade deal this week and “talk of negative rates melts away,” said Kit Juckes, macro strategist at Societe Generale.

Money markets have pushed back expectations UK interest rates will turn negative, to June 2021 from May.

“A vaccine could make the biggest difference to the economic outlook for those countries that have struggled the most, especially with large services sectors like the UK,” said Stephen Innes, chief global market Strategist at Axi.

An obstacle that might have the EU from signing off on a deal and possibly put off the U.S. president-elect, Joe Biden - the Internal Market Bill - was taken off the table after Johnson suffered a heavy defeat in parliament’s upper chamber on Monday.

The proposed laws would have allowed Johnson to breach Britain’s EU exit treaty - a plan that has been criticised by Biden.

Three-month implied volatility gauges in sterling have picked up a bit, but the levels remained around where they were in September. That suggests investors are less worried about unexpected moves in the currency as Britain leaves the EU.

Reporting by Olga Cotaga, editing by Larry King and David Gregorio