August 22, 2018 / 8:51 AM / 2 months ago

'Highly conditional' Brexit optimism sends pound to two-week highs

LONDON (Reuters) - The British pound hit its highest level in two weeks against the dollar on Wednesday, benefiting from broad selling of the U.S. currency and cautious optimism from investors on the state of Brexit negotiations, which resumed this week.

FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

There have been mixed messages this week on whether British and EU officials will meet an informal October deadline to reach an agreement on how they will structure trade ties following their divorce next year.

Diplomats in Brussels said they expected a delay in finalizing the terms of Britain’s exit and could need to hold an emergency summit in November.

But British Brexit minister Dominic Raab said late on Tuesday that he was confident an exit agreement could be reached by an October 18-19 summit of EU leaders.

Dollar weakness after U.S. President Donald Trump’s said that he was unhappy with the Federal Reserve for raising interest rates also helped the pound earlier this week.

In the wake of Raab’s comments, sterling hit its highest levels against the greenback in 12 days, at $1.2924. It extended those gains to $1.2936 on Wednesday, hitting its highest since August 8 as the dollar weakened further.

The British currency had plunged to nearly 14-month lows last week as worries the UK will crash out of the EU without a trade deal mounted.

By 1523 GMT on Wednesday, sterling was 0.1 percent higher at $1.2910 GBP=D3.

The pound was 0.2 percent lower against the euro, however, at 89.81 pence per euro as the single currency strengthened versus most currencies. EURGBP=D3

Ken Odeluga, market analyst at CityIndex, said key EU and Brexit protagonists were expressing “highly conditional optimism” and even “confidence” about reaching a deal - a far cry from the near ‘no deal’ consensus of a few weeks ago.

“The most substantial development for sterling would be, if confirmed, any suggestion from (Michel) Barnier’s office that more time could be offered at any stage,” Odeluga said.

Analysts at Commerzbank also noted British government papers due to be published this week which analyse the possible consequences of a no-deal Brexit would be key for sterling’s near-term performance.

Clive Shelton, director at money transfer provider EasyFX, said currency markets had already priced in much of the risk of a ‘no deal’ Brexit, and that a greater risk for companies lay in sterling rallying should a deal go through.

“There is a chance that firms could over-hedge which could lead to significant loses. Rather than taking a one-sided view that sterling will fall, firms must think about how to reduce risk whatever the outcome,” Shelton said.

Reporting by Ritvik Carvalho; Editing by Tommy Wilkes and Raissa Kasolowsky

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