Sterling hit a 6-1/2 month high versus the euro on Tuesday after the British cabinet office minister said the United Kingdom and the European Union were on the cusp of a Brexit deal, lifting hopes of an imminent breakthrough in talks.
The British currency had tumbled on Monday on fears that negotiations with Brussels on the terms of the UK’s exit from the EU were deadlocked less than five months before the official departure date of March 29, 2019.
David Lidington, Prime Minister Theresa May’s de facto deputy, told BBC radio on Tuesday that Britain and the EU were “almost within touching distance” of an agreement. He said it was still possible there could be a deal in the next 24 or 48 hours.
The pound rose more than half a percent versus the euro to 86.82 pence in the hours after Lidington’s comments, hitting its highest since April.
Sterling also jumped as high as $1.2929 from around $1.2870 before Lidington’s comments, up more than half a percent on the day. It later extended those gains to $1.2980, up nearly one percent and back to levels it traded at on Friday.
Volatility in the pound has surged as Brexit discussions intensify and investors position themselves.
Investors’ expectations for price swings in the pound versus the dollar over the next one and three months <GBP3MO= have soared to their highest since early 2017.
Neil Mellor, currency strategist at BNY Mellon, noted that May still has to win over many members of her party as well as the Northern Irish Democratic Unionist Party, which props up her minority government.
“Amid talk that this week could be the Cabinet’s last chance to secure an agreement to present at a November EU summit, Ms. May’s proposals are tasked with healing an increasingly divided Conservative party while also keeping the party’s DUP allies onside,” said Mellor.
The EU wants to get agreement on a draft deal by the end of Wednesday at the latest if there is to be a summit this month to approve it.
Brussels diplomatic sources fear that any delay will increase the chances of rejection by May’s ministers or the British parliament.
Separately, official data showed British workers’ underlying pay rose at the fastest pace in nearly a decade in the three months to the end of September, although sterling was largely unmoved.
The jobless rate picked up to 4.1 percent. Economists in a Reuters poll forecast it would hold steady at 4 percent.
“In terms of reaction it’s been pretty muted with the pound and FTSE barely budging, with the markets seemingly waiting with bated breath for the latest Brexit developments,” said David Cheetham, an analyst at online trading firm XTB.
