Sterling driven by weaker dollar; traders hope for Brexit trade deal

Sterling rose against the dollar but fell versus the strong euro on Tuesday, with investors still searching for clues on how likely it was that Britain would reach a trade deal with the European Union by the end of the year. "Trade talks between the EU and UK remain at an impasse with time quickly running out to reach a deal before the end of this year," said Lee Hardman, currency analyst at MUFG.

Sterling rose against the dollar but fell versus the strong euro on Tuesday, with investors still searching for clues on how likely it was that Britain would reach a trade deal with the European Union by the end of the year.

"Trade talks between the EU and UK remain at an impasse with time quickly running out to reach a deal before the end of this year," said Lee Hardman, currency analyst at MUFG. But "the developments are unlikely to materially alter market expectations that a trade deal remains the most likely scenario, despite recent turbulence which is helping to dampen pound weakness," Hardman said.

The pound was last trading up 0.2% $1.2968, while against the euro it was down 0.4% at 91.26 pence, having slipped earlier to a two-week low of 91.48 pence. On a month-to-date basis the pound remains little changed, despite Brexit-related uncertainty.

However, traders were bracing for further volatility as they bought more protection in the options market. Options costs highlighted that overnight implied volatility rose to nearly 12%, a more than two-month high. "A true breakthrough would be the news that an agreement has been reached on the issue of fishing. That would be more suited to justifying strong sterling appreciation as this is one of the real stumbling blocks in the negotiations," said Thu Lan Nguyen, currency analyst at Commerzbank.

"Until that is reached, I would remain cautious," she said. On Monday, Britain said it saw no basis to resume trade talks with the EU unless there was a fundamental change in approach from Brussels.

Talks halted last week as Prime Minister Boris Johnson said there was no point in continuing them, canceling an in-person meeting. Discussions still were held over the phone, but negotiations have not resumed yet officially. An EU executive said on Tuesday the bloc was ready to keep on negotiating a new trade arrangement with Britain.

 

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