Sterling erased earlier losses and headed back towards the day’s highs in volatile trading on Tuesday on growing hopes of a Brexit deal breakthrough after a cabinet meeting.
British Brexit Secretary Dominic Raab said “Thumbs Up” on his way out of a weekly cabinet meeting, according to a tweet by the BBC political editor, sending the euro to a five-month low against the British pound EURGBP=D3.
Against the dollar GBP=D3, the pound hit a two-week high at $1.3090.
While hopes have grown of a Brexit deal in recent days, fuelling a 3 percent rally in the British pound over the last week, domestic opposition from within Prime Minister Theresa May’s own Conservative party and parliament has made investors wary of betting big on the pound.
A senior member of the Northern Irish Democratic Unionist Party earlier said it looked like Britain would exit the European Union without a divorce deal, indicating the growing domestic political headwinds to getting a deal through a deeply split parliament with less than five months left before Brexit day.
Headlines on the progress of Brexit negotiations have made the pound increasingly jumpy. Implied volatility on one-month pound GBP1MO= options, a gauge for expected swings in the British currency, is at its highest levels since February.
Northern Ireland’s DUP, which May’s minority government relies on to get legislation through parliament, has vowed to scupper any Brexit deal that treats the province differently from the rest of the United Kingdom.
Some unwinding of short positions has also helped sterling. While net shorts have shrunk slightly from more than two-year highs in September, they remain near historical highs.