Sterling edges higher as traders focus on drawn-out Brexit talks

LONDON (Reuters) - Sterling rose against a broadly weaker dollar and edged higher against the euro on Tuesday as traders awaited news on the progress of trade talks between Britain and the European Union.

FILE PHOTO: Pound banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

Britain’s chief negotiator David Frost has told Prime Minister Boris Johnson to expect a Brussels trade deal “early next week”, The Sun reported, with “a possible landing zone” as soon as next Tuesday.

That had followed news last week that Dominic Cummings, one of the political architects of the Brexit project, was set to leave the government, leading some observers to predict a greater chance of a deal.

After pushing through to a weekly high of 1.3272 against the dollar halfway through the London trading day, comments from Prime Minister Boris Johnson to his top ministers that a deal was far from certain, saw a slight pullback.

“We are working hard to find solutions which fully respect UK sovereignty, but it is far from certain that an agreement will prove possible and time is now very short,” Johnson told ministers.

At 1523 GMT, the pound was up 0.5% against the dollar at $1.3265, aided by a broad-based weakening of the U.S. currency as COVID-19 cases surge in the United States and the need for more stimulus grows. Versus the euro, the pound was up 0.3% at 89.515 pence per euro.

“Though the chance of a ‘No Deal’ outcome to negotiations is still alive, it does appear that gravity and politics are pulling the EU and UK closer to a deal and sterling is getting some benefit from this,” Timothy Graf, head of macro strategy for EMEA at State Street, told Reuters.

That said, the longer-term prospects for the pound were less rosy, given the likely disruptions to trade regardless of any compromises that are made to get a deal done, he added.

“Brexit still threatens to be a highly disruptive event to trade, supply chains and the workings of the UK’s financial services sector. A healthy discount to sterling is likely required for the foreseeable future in order to attract the capital inflows needed to sustain a twin deficit economy.”

Giles Coghlan, Chief Currency Analyst at HYCM, said with market positioning in the pound/dollar options market suggesting investors were hedging core long positions in the pound, it was clear they were expecting a deal.

One-month sterling implied volatility, a gauge for expected swings in the pound was at 9.8%

Additional reporting by Saikat Chatterjee; Editing by Alex Richardson and Alistair Bell