Pound set for biggest weekly gain vs euro in more than a year on Brexit hopes

LONDON (Reuters) - The pound weakened on Friday as investors took profits after a stellar rally that set the currency up for its biggest weekly gain against the euro in more than a year on growing confidence that a no-deal Brexit can be avoided.

FILE PHOTO: New one pound coins, which come into circulation today, are seen in London, Britain March 28, 2017 REUTERS/Neil Hall

Data showing British shoppers cut back on spending in the three months to December was broadly in line with market expectations and sparked just a brief rise in sterling.

The bigger focus for traders remained Brexit, especially after a tumultuous week in which British Prime Minister Theresa May’s deal suffered a heavy defeat in parliament but won a subsequent vote of confidence.

Those developments boosted a perception in markets that Britain will be able to avoid leaving the EU without a deal.

The pound has risen about 1.3 percent against the euro EURGBP=D3 this week, set for its biggest weekly gain since December 2017.

“Sterling has rallied quite a bit over the past week-and-a- half and the weakness today is a bit of check on those gains and a bit of profit taking,” said Tapas Strickland, of National Australia Bank in London.

“The market is pricing out the risk of hard Brexit and some kind of agreement ... so against this background, you’d expect sterling to grind higher above $1.30.”

At 1540 GMT, the pound was down 0.65 percent at $1.2895 GBP=D3, having touched $1.30 on Thursday.

Against the euro, sterling slipped 0.5 percent to 88.12 pence and below two-month peaks hit a day earlier at around 87.65 pence.

On Friday, prominent Brexit campaigner Nigel Farage said the United Kingdom is likely to delay Brexit and another referendum is possible.

May is due to hold a series of meetings with some of her top ministers on Friday to discuss the way forward after her deal with Brussels was rejected by parliament, her spokeswoman said.

“The bottom line for sterling is that when the probability of second referendum rises it is positive and when the probability of hard Brexit rises it is negative so sterling crashes between the two views,” said Adam Cole, chief currency strategist at RBC Capital Markets.

Ross Hutchison, rates portfolio manager at Aberdeen Standard Investments, added that as concerns about a no-deal Brexit recede, factors such as brighter outlook for the economy and what the Bank of England will do on rates come back into play.

“I think that kind of analysis is broadly correct but that doesn’t mean there couldn’t be an accident on Brexit,” he said.

Britain's 10-year government bond or gilt yield rose to 1.376 percent GB10YT=RR on Friday, its highest in more than six weeks.

(This story has been refiled to add dropped word in paragraph 4)

Reporting by Dhara Ranasinghe; Editing by Robin Pomeroy