The pound rallied against the euro and dollar on Monday, boosted by Brexit deal hopes and comments from a Bank of England policymaker on negative interest rates.
Sterling rose as much as 1% against the dollar and euro on Monday as traders reacted to reports that a Brexit trade deal could be edging closer. It came despite officials on both sides saying significant gaps remained between the EU and UK.
Various reports in the weekend press suggested that both the UK and EU were willing to make concessions in a bid to reach a deal.
The Sunday Times reported that negotiators hope to enter the “tunnel” — the final, secret phase of deal talks — by the end of this week. The Financial Times carried a similar report on Sunday and quoted an unnamed Whitehall source as saying UK prime minister Boris Johnson “very much wants a deal.”
Watch: What is a no-deal Brexit and what are the potential consequences if it?
Hopes of a last-minute agreement come after talks almost collapsed at the start of the month. The EU threatened to sue the UK and walk away from trade talks after Britain announced plans to renege on part of the Withdrawal Agreement, breaking international law in the process.
Analysts said the apparent change in tone of negotiations had helped to boost sterling.
“We think the narrative that the UK government will once again agree on a last-minute deal of some sorts will reduce the incentive for fast-money investors to chase a bearish GBP story,” said Viraj Patel, head of macro & geopolitics research at Arkera.
The pound was also boosted by comments made by Deputy Bank of England governor Dave Ramsden on Monday morning. Ramsden suggested that the central bank would not introduce negative interest rates any time soon, despite preparatory work being done around the policy.
“Governor Andrew Bailey has flirted with the notion of negative rates on multiple occasions, which has become one of the main talking points at the last few Bank of England policy meets,” said Sebastien Clements, a currency analyst at OFX.
“Ramsden’s claim that he believes 0.1% is the optimal interest rate for the UK right now left the pound against the dollar at just below 1.29.”
The pound had come off its intraday highs by mid-afternoon after comments from EU and UK officials playing down the prospects of a Brexit deal.
Cabinet minister Michael Gove, who is in charge of implementing Brexit, met with European Commission vice-president Maros Sefcovic for high-level talks in Brussels on Monday.
After the meeting, Sefcovic repeated calls for the UK to withdraw its Internal Markets Bill, which would break the Withdrawal Agreement. He said the two sides remained “far apart”.
A spokesperson for Downing Street said “significant gaps” remain between the two sides despite “relatively positive” recent talks.
By mid-afternoon, the pound had retreated to a gain of 0.7% against the euro and 1% against the dollar.
Watch: Gove warns of 'challenge' at end of Brexit transition period
Brexit trade talks are likely to continue to dictate the direction of sterling for the rest of the week. The UK’s negotiating team, led by Lord David Frost, will travel to Brussels on Tuesday to resume talks with EU counterparts.
Both sides have just weeks to reach a deal to avoid a disorderly exit of Britain from transition arrangements at the end of December. Earlier this month, UK prime minister Boris Johnson has set a deadline of 15 October to strike a deal. Michel Barnier, the EU’s chief negotiator, has also said a deal is needed by October to give enough time for EU lawmakers to approve it before the 31 December deadline.
“If there is no progress this week, a no-deal Brexit seems the likely outcome,” said Milan Cutkovic, a market analyst at AxiCorp.
Jordan Rochester, a foreign exchange strategist at Nomura, said it would be “a tough week for trading GBP.”