Pound up as EU's Barnier says Brexit deal possible this week

An employee is seen walking over a mosaic of pound sterling symbols set in the floor of the front hall of the Bank of England in London, in this March 25, 2008 file photograph. REUTERS/Luke Macgregor/Files

LONDON (Reuters) - Sterling rose on Tuesday to a five-month high against the euro after the European Union’s chief Brexit negotiator said a deal with Britain over the terms of Britain’s departure was still possible this week.

It gave up some of those gains but stayed near the three-and-a-half month high of $1.2707 it reached last week, when the currency was lifted by optimism that a Brexit deal could be struck before the Oct. 31 deadline to exit the EU.

The pound rose as much as 0.7% to $1.2699 and by a similar magnitude against the euro to 86.90 pence after negotiator Michel Barnier said an agreement could be reached. But he also warned that a deal was getting more and more difficult.

By 0745 GMT sterling was 0.4% higher at $1.2660. It was up 0.5% at 87.085 against the euro.

Hopes that a deal might be thrashed out at the Oct. 17-18 EU summit drove sterling to its best week since 2017 last week. It fell on Monday as it became clear the two sides were still far apart.

“The pound’s moves higher are driven by belief a deal can be struck, but we are hearing some scepticism from the EU ... I think more concessions will be needed from (Prime Minister Boris Johnson), but if he delivers them it will be at the cost of any majority he may have in parliament for the deal,” said Morten Lund, an analyst at Nordea Markets.

Lund expects a three-month extension, but he added that economic weakness and prolonged Brexit uncertainty would probably weaken sterling to around 91 pence against the euro by the end of the year.

The UK will release unemployment and average earnings data at 0830 GMT.

Reporting by Tommy Reggiori Wilkes and Sujata Rao; editing by Larry King