December 8, 2017 / 9:43 AM / a year ago

Sterling skids as investors bank Brexit deal gains

LONDON (Reuters) - Sterling skidded on Friday, trading almost two U.S. cents below a high reached earlier after a breakthrough in Brexit negotiations, with cautious investors booking profits after a sharp rally in recent days.

British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration

Britain and the European Union reached a divorce deal on Friday that paves the way for arduous talks on future trade ties, easing immediate pressure on Prime Minister Theresa May and raising hopes of an orderly Brexit.

That sent sterling rallying to as high as $1.3521 earlier in the day, and to a six-month high against the euro, on investor relief that an EU summit next week will clear the talks to move forward to trade and transition arrangements.

But with Britain’s economy still facing headwinds, traders were quick to take profits on sterling, pushing it down the day.

Sterling dipped to as low as $1.3356, down almost 0.9 percent on the day. Against the euro, it slipped 0.8 percent to 88.06 pence, having earlier strengthened to 86.90 pence.

“There’s a sense here that we’re just moving on to the next issue. Have we really done anything more than kicking the can down the road a little bit?” said Societe Generale macro strategist Kit Juckes.

“(But it’s mainly) just a December Friday - no one’s going to go in and buy lots of pounds. We’ve had a decent run and nobody wants to enter the weekend with a lot of risk on the table.”

Having earlier hit a seven-month high, the Bank of England’s trade-weighted sterling index slipped 0.9 percent.

“I think we’ve seen a classic case of the rumour being bought and the fact sold, with sterling having rallied early last week in anticipation of a deal being close,” said OANDA analyst Craig Erlam.

The European Commission said enough progress had been made after the two sides worked through the night to reach a deal over the status of the Irish border, which had scuppered an earlier attempt to clinch a deal on Monday.

“We could see more upside in the pound in the coming months but as it was before, the road ahead is bumpy and that will be reflected in the currency markets,” Erlam added.

RBC strategists said Brexit negotiations aside, the economy remained in a fragile state, with the Bank of England’s November rate hike seen widely as a “one and done” move.

Additional reporting by Abhinav Ramnarayan; Editing by Mark Heinrich

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