The pound stabilised on Tuesday after Monday’s sharp rebound as market participants grew more optimistic about the chances of a Brexit deal, but implied volatility gauges pointed to further price swings ahead as the Dec. 31 Brexit deadline approaches.
Sterling dropped to as low as $1.3135 last Friday and implied volatility surged to its highest since March, when British Prime Minister Boris Johnson said a no-deal was “very very likely”.
It then rebounded to as high as $1.3444 on Monday as market participants were relieved that negotiators agreed on Sunday to “go the extra mile” to try to reach a deal in the coming days and the European Union’s chief Brexit negotiator said a deal was still possible.
At 0840 GMT on Tuesday, the pound was at $1.3306 versus a slightly stronger dollar, down around -0.2% on the day, as traders waited for further updates on negotiations.
Versus the euro, it was steady at 91.235 pence.
“Following its rebound yesterday, GBP has now stabilised, pencilling in lower odds of a negative outcome from the UK-EU trade negotiations,” ING FX strategists wrote in a note to clients.
“The post-weekend progress in negotiations is now priced into the pound,” they said, adding that they expect euro-sterling to stabilise around 0.9100 in Tuesday’s session.
Britain and the EU have just over two weeks left to negotiate a deal covering nearly $1 trillion in annual trade before Britain loses zero-tariff zero-quota access to the bloc’s single market on Dec. 31.
Speculative positioning on the pound turned net bullish in the week to Dec. 8, according to weekly futures data, and implied volatility gauges have dipped down from last Friday’s peak, suggesting the market is still optimistic about the chance of a deal.
“Our view is once again that a deal is firmly more likely than not, with the risks tilted towards full resolution by the end of the week,” wrote Deutsche Bank strategist Shreyas Gopal in a note to clients, adding that a Brexit deal would see sterling rally to around $1.36.
“Confirmation of a deal would remove one of the largest lingering risks for the pound, and should allow the market to at a minimum take out the increased negative rates pricing of the last few days,” he said.
The Bank of England meets on Thursday. Analysts say the risk of negative rates being introduced in 2021 depends on the impact of Brexit on the UK economy.
Britain’s jobless rate rose in the three months to October and redundancies reached a record high as companies were hit by new COVID-19 restrictions, official data showed.
Reporting by Elizabeth Howcroft, editing by Ed Osmond