LONDON (Reuters) - Sterling rose to an eight-day high on Friday as traders awaited the outcome of last-ditch efforts by Prime Minister Theresa May to unite her government over plans for Britain’s future outside the European Union.
The meeting at Chequers, May’s country residence, which is set to run late into the evening, will see her appeal to ministers to put Brexit divisions behind them and move forward by backing her white paper policy document.
The pound’s rise on Friday was largely down to dollar weakness following the release of U.S. employment data.
The perceived lack of progress in talks with Brussels over Britain’s exit from the EU in March 2019 has weighed on the pound this year. Combined with signs of economic weakness, it has pushed the currency to near seven-month lows.
The European Union told Britain on Friday there were still too many unanswered questions over Brexit.
Traders expect volatility in the pound to jump once details of an agreement — or a lack of one — become clear late on Friday.
The risk for May is that a number of ministers might quit if they consider her plan to be a “soft Brexit”, or one that is too similar to Britain’s current relationship with the EU. On the other hand, many analysts expect Brussels will reject her plan.
The first details of May’s new plan for close customs ties with the EU — a “facilitated customs arrangement” — won mixed reviews, with one Brexit campaigner saying it could leave the country out of Europe, but still run by Europe.
“Pound volatility overnight still appears low given the potential for this to spark a period of domestic political uncertainty in the UK,” MUFG strategist Derek Halpenny said. “There is a high risk of some sharper volatility at the start of next week and this risk still appears under-priced.”
The pound rose 0.4 percent to as high as $1.3279 against the dollar in early Friday trading. It slipped 0.2 percent against a broadly stronger euro to 88.64 pence.
“Reports that pro-Brexit cabinet ministers will ‘behave’ over the coming months is a minor win for the currency,” said Viraj Patel, an analyst at ING who is bullishness on sterling.
“However, for Brexit risks to fully dissipate, the response from EU officials to the UK government’s Brexit plan is what truly matters for pound markets.”
Sterling will not move much in the run-up to Britain’s departure from the European Union in March next year but will gain ground against the U.S. dollar afterwards, a Reuters poll of foreign exchange strategists predicted.
Reporting by Tommy Wilkes; Editing by Catherine Evans