No Brexit Deal Possibility Limits Gains of the British Pound

The British pound fell after hitting a one-week high against the euro on Thursday as the risk of a no-deal Brexit curbed the currency’s gains.

The sterling was down 0.3 percent to 0.8956 against the euro, after reaching a one-week high against the euro after European Union’s lead Brexit negotiator Michael Barnier said on Wednesday the EU was ready to offer a partnership with Britain such as has never been with any other third country.

Barnier’s comments raised hopes for a deal between London and Brussels on the UK’s departure from the trade bloc, although he noted that the EU would not consent to anything that would harm its single market.

Barnier also toned down those positive remarks on Thursday, stating that the EU must also prepare for the possibility of a no-deal Brexit.

Senior currency strategist Neil Mellor said Barnier’s comments are more nuanced and that has caused a slight positioning shift towards sterling rather than a broader fundamental change towards the currency’s outlook.

No Brexit Deal Outlook to Continue Supporting the Pound

The pound remains supported by the no-deal prospect and, despite this week’s progress which pulled the sterling as high as 89.73 per euro on Thursday, the currency remains well off its year-to-date high of 86.2 hit in April.

Against the US dollar, the currency was rather more subdued as it stayed close to a one-month high around $1.3024.   

Managing Director Kathy Lien stated that even though no agreement has been reached yet, the EU’s willingness to cooperate should be enough to take the currency even higher, adding that the pound could climb to at least $1.3050 and perhaps even $1.32 on short covering flows alone.

With Britain having seven months left before it departs, its government has been accelerating its no-deal arrangements. Negotiators on both sides are expecting more and more that an informal October deadline for settling a deal will be move to November.

Brexit Secretary Dominic Raab told lawmakers on Wednesday that while a deal was likely to happen, there was a measure of leeway over the exact timetable.

As the political outcome over Brexit became less certain, hedge funds have in recent weeks set up short positions against the pound to more than one-year highs, which means any change in sentiment towards the sterling can result to big moves.

Implied market volatility on the British currency for this week has also edged higher than its counterparts in the euro and the yen.

However, a trader at a European bank said higher sterling volatility means more difficulty in holding short positions and the latest headlines are leading to wipe out in some of those aggressive shorts.

FSMSmart gives you the latest news updates, market trends, and news about forex, commodities, stocks and many more! Open an account now and learn more about other investment opportunities on FSM Smart.