The pound surged as investors bet that Brexit talks would resume – despite the UK’s tough rhetoric – and eventually result in some kind of free-trade agreement.
Sterling was up 0.7 per cent by mid-morning at $1.30. It had risen 0.5 per cent against the euro to stand at €1.107.
Prime Minister Boris Johnson struck a combative tone on Friday, saying there was no point in continuing talks unless the EU budged on key issues such as fishing and state aid.
He told the UK’s businesses to prepare for an “Australia solution”. That is, for the UK to leave the bloc without a trade deal.
Yet Cabinet Office minister Michael Gove said at the weekend that the door is still “ajar” for talks.
Meanwhile, reports said the EU was preparing for more discussions. The bloc’s leaders are not convinced that the UK is really willing to walk away.
The signs of movement on both sides, along evident agitation from businesses, has encouraged investors that serious talks will continue.
Pound investors ‘dismiss’ no-deal rhetoric
Ricardo Evangelista, senior analyst at Activtrades, said: “The markets are dismissing the British government’s rhetoric that negotiations with the EU are over and the future trade relationship will be based on WTO [World Trade Organization] terms as a bluff.
“If investors’ stance in relation to sterling is anything to go by, then negotiations are far from over and the chances of a deal between the two parts being reached are reasonably high.”
EU Brexit negotiator Michel Barnier and his UK counterpart Lord David Frost will speak today to discuss the next steps.
Housing secretary Robert Jenrick this morning reinforced Gove’s message that a deal could still be done.
“We hope that they could come forward now with some relatively small but important changes,” he told Sky News.
The CBI and other trade organisations this weekend said the business community is “united” in wanting a deal.
“Now is the time for historic political leadership,” said the business groups. “With compromise and tenacity, a deal can be done.”
Lee Hardman, currency analyst at MUFG, said: “Market participants continue to believe that a trade deal will be reached.”
Yet he said he expected investors’ confidence to be “severely tested”. He said there are “downside risks to the pound should trade talks fail to progress as time quickly runs out to reach a deal”.