The pound climbed about 1 percent as trade began in Australia and New Zealand to hit $ 1.3367. It rose 0.8% against the euro to € 1,1007.
Monday’s gains partially reversed last week’s 1.6% drop, triggered by warnings from EU and UK leaders that Britain could leave the bloc without a trade deal when the period Brexit transition will end at the end of this year. Trading volumes are generally low for European currencies early in the Asian morning, but the gains point to sentiment picking up from last week’s swing.
Boris Johnson, British Prime Minister, and Ursula von der Leyen, President of the European Commission, agreed on Sunday in a “constructive” call to “go the extra mile” to try to break the deadlock, as both sides reported some progress. Still, no deadline has been set for the negotiations, and UK officials have admitted they can extend until Christmas.
Goldman Sachs said on Sunday that he expected the pound to rise up to 2 percent against the euro on “apparent progress towards a deal – or at least avoiding a no-deal outcome for the moment “.
Barclays analysts warned, however, that negative risks to the pound would persist until negotiators reach a deal. If the EU and UK strike a deal, the currency could trade above $ 1.35, the bank said. In the event of a no-deal outcome, Barclays expects the pound to drop to around $ 1.25.
“An agreement remains our base case closely and. . . we expect the pound to rebound eventually, ”the UK bank strategists said.
Gregory Perdon, co-chief investment officer at Arbuthnot Latham, said he had “doubts” last week about his bet the pound sterling would rise. However, he decided to stick to his “conviction” because “both parties are probably better off economically with a deal”.
“Hopefully rationality wins in this case,” he says.
The sterling gains on Monday precede Thursday’s Bank of England meeting. Economists broadly expect the central bank to maintain its policy after stepping up its £ 150bn bond buying program at its November meeting.
Bank of America said the Brexit news remained the potential short-term catalyst for a change in the BoE and that “if the markets got nervous, the BoE could accelerate the pace of buying QE in the short term.”
Measurements of expected sterling volatility over the next month remain elevated, indicating heightened market expectations for a pound uproar as the end of 2020 approaches.