LONDON (Reuters) - The British pound extended its rally on Friday and was on track for its biggest weekly gain in a month after the Bank of England’s decision to keep interest rates steady on signs of a post-election pick-up in growth.
But analysts said the rally may be short lived. The United Kingdom exits the European Union at 2300 GMT and faces negotiations on reaching a new trade and future relationship deal with the bloc by the end of 2020 - something the EU has said will not be easy.
“Looking ahead, there are more downside risks to the pound as investors gauge the progress of the Brexit negotiations,” said Morten Lund, a strategist at Danske Bank who expects euro/pound to rise to 86 pence over the coming months.
At the stroke of midnight in Brussels, the EU will lose 15% of its economy, its biggest military spender and the world’s international financial capital - London. Britain must begin charting a course for generations to come.
But in the final countdown to Brexit, the pound was still basking in the after glow of the Bank of England’s decision to hold interest rates on Thursday at Governor Mark Carney’s final policy meeting.
Sterling gained 0.8% to as high as $1.3245, its highest level in eight days on Friday. Against the euro, the British currency rose 0.2% to 83.88 pence.
On a weekly basis, the pound was on track for a second consecutive week of gains against the dollar and its best weekly performance since end December.
Risk reversals and implied volatility gauges for the pound signalled calm over the next few months, with both indicators holding near recent lows.
Analysts also attributed the pound’s strength to broad-based dollar weakness.
Reporting by Saikat Chatterjee; Editing by Timothy Heritage and Andrew Heavens