Thursday 17 December 2020 9:41 am

Pound hits 31-month high on Brexit hopes and dollar weakness

The pound has shot up to its highest level since early 2018, with investors hoping the UK will soon sign a post-Brexit trade deal and the dollar falling sharply.

Sterling was last up 0.6 per cent at $1.358, a 31-month high. It was 0.3 per cent higher against the euro at €1.111.

Read more: Ursula von der Leyen: ‘Narrow path to agreement’ in Brexit talks

The British government said today that the negotiations are in the final stages. “We are in that tunnel of negotiation and our teams continue to work incredibly hard,” home secretary Priti Patel told LBC Radio.

Over the last few days, optimism has risen markedly compared to the pessimism of last week. Media reports have suggested the UK has given ground on fish, and the EU has come closer to the UK position on competition rules.

Read more: Sunak: Covid schemes could stave off damage from Brexit turbulence

However, a no-deal Brexit is still a very real possibility. Patel said that the country will be ready for such an outcome. 

MPs begin their Christmas break on Thursday, making it potentially more difficult for a deal to be ratified in time, although they can be recalled with 48 hours’ notice.

Dollar’s post-Fed fall helps pound

Nonetheless, sterling traders have not been deterred. Dollar weakness also gave them a strong helping hand after the US Federal Reserve’s decision last night.

The Fed said it would keep buying at least $120bn (£88bn) of debt per month until a strong recovery materialised. 

Read more: Federal Reserve extends debt purchases to boost economy

Chair Jay Powell hailed the new guidance as a “powerful message” about the Fed’s willingness to support the economy, but also upgraded the central bank’s economic forecasts.

The central bank support and a brighter outlook convinced investors to sell safe-haven assets such as the dollar in favour of riskier assets like equities.

Read more: Vaccine ‘gamechanger’ will see UK economy bounce back sharply, analysts say

The greenback was down 0.5 per cent against a basket of other currencies this morning. It was the first time the dollar index had dipped below 90 since early 2018.

“Throw in hope that a fiscal package will be forthcoming, that an EU-UK trade deal can be… that the [EU] recovery Fund is up and running and of course, that vaccine deployment will continue, and the stage is set for the dollar to go on falling,” said Kit Juckes of Societe Generale.