Pound Jumps 1% as Optimism on Brexit Talks Rises, Dollar Weakens

(Bloomberg) -- The pound rallied as much as 1 percent amid improved confidence of progress in the Brexit negotiations and broad dollar weakness.

Part of the move in sterling was driven by traders selling the greenback for the end of the month, according to traders in London and Europe. The pound had earlier rallied against all of its Group-of-10 peers after the London-based Times reported that Britain and the European Union were close to an agreement on the future Irish border, a hurdle toward moving to trade talks.

Signs of a possible breakthrough on the Brexit divorce bill ahead of a key meeting next week led money markets on Wednesday to bring forward pricing for the next Bank of England rate increase to September from November 2018. Still, the options market suggests sterling's rally will be limited, with one-month implied volatility having dropped 97 basis points over the past 11 days to reach 7.65 percent on Thursday.

“With each hurdle that's cleared, the pound might just get a bit stronger until we get to the final huge hurdle, which will be the vote in the U.K. and EU parliaments to decide whether the final agreement is acceptable,” Steven Barrow, Standard Bank's head of currency strategy, wrote in a research note. “Until this final hurdle is cleared it seems unlikely to us that the scaling of these smaller hurdles, like the Brexit bill, can generate a significant sterling rally.”

The pound climbed to $1.3549, the strongest level since Sept. 25. It advanced 0.3 percent to 88.13 pence per euro as of 4:04 p.m. London time. The yield on 10-year U.K. government bonds dipped one basis point to 1.33 percent, having earlier risen to the highest in almost a month.

With a preliminary agreement on the Brexit bill reported to have been reached by negotiators, Britain and the EU are now working on a compromise over the Irish border before a meeting on Monday between Prime Minister Theresa May and European Commission President Jean-Claude Juncker. Sterling is likely to see sharp ebbs and flows as the Brexit saga continues, according to Barrow.

--With assistance from Vassilis Karamanis

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Scott Hamilton, Keith Jenkins

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