Pound at 3-month highs but derivatives flash orange on Brexit deal unease

The British pound climbed to a three-month high above $1.34 on Thursday as a U.S. dollar selloff gathered momentum but growing unease about a Brexit trade deal prompted investors to take protective action in the derivative markets.

The British pound climbed to a three-month high above $1.34 on Thursday as a U.S. dollar selloff gathered momentum but growing unease about a Brexit trade deal prompted investors to take protective action in the derivative markets. European Union negotiators have moved to "within millimetres" of the limits of their negotiating mandate at Brexit trade talks so it is up to London to compromise if a deal is to be reached, an EU diplomat said on Thursday.

But Prime Minister Boris Johnson's government pushed ahead with two bills that would breach the 2020 Brexit treaty despite protests from Brussels. A transition agreement comes to an end later this month. "In such a case, a no-deal Brexit may become an even more realistic outcome and the currency could fall off the cliff," said Charalambos Pissouros, a senior market analyst at JFD Group. Negotiators were reportedly stuck on differences over fisheries, state aid for companies and rules to resolve disputes, offsetting any optimism from Britain becoming the world's first country to approve the Pfizer-BioNTech COVID-19 vaccine.

"For the pound to rebound, we need to see headlines suggesting that the two sides have found some sort of common ground over their main differences, which are fisheries, governance, and level playing field," he said. In late London trading, the pound gained 0.6% to a three-month high of $1.3461 thanks to broad-based dollar weakness.

Versus the euro, the pound rose 0.4% to 90.22 pence. But beneath the calm in the cash markets, derivative markets were signalling rising unease with the state of Brexit talks with one-month risk reversals for the pound, a gauge of calls to puts for the currency, indicating rising bearish bets.

The ratio fell to 2.7 on Wednesday, levels last reached in April. It was trading around 0.9 two weeks earlier. Gauges of expected price swings in the pound for one-month maturities climbed to a one-month high of nearly 11% from around 9% last month.

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