By Eamon Quinn
Sterling held up well despite the crashing of weekend hopes of a breakthrough in the Brexit talks, reflecting belief a deal will be struck in the next few days or months, analysts said.
The pound held steady even as Theresa May’s government and EU negotiators failed to find an agreement, over the weekend, on the best way to keep the border open following Brexit.
Capital Economics in London said that it now rated the risk of a no-deal by the end of the year as high as 50%, which “could knock between one and three percentage points off [UK] GDP growth next year, depending on the scenario”.
They said there would be a “sharp” rebound in investment in the UK if the politicians were to strike a soft Brexit deal.
“This should allow GDP growth to quicken from a miserly 1.3% in 2018 to about 2% in 2019 and 2020... However, the risks are to the downside as the chances of a no-deal Brexit have risen considerably over the past few months,” said the economists.
Nonetheless, the pound was little changed against the euro at 88.05p and against the dollar at $1.3157.
“The limited reaction of sterling to the news over the weekend could reflect the fact that the developments do not alter the view in the markets about the likelihood of a no deal.
"Markets could take the view that a deal could still be salvaged on Thursday, or failing that, at an emergency summit in November or the EU Council meeting in December,” said Capital Economics.
Sterling’s resilience helped bolster London’s Ftse 100, rising along with other world stock markets following last week’s US-led sell-off.
“While US retail sales have not provided much joy, an estimate-beating report from Bank of America has helped keep bearish sentiment in check. Last week’s outbreak of fear is receding, although not as quickly as it arrived. Caution is still the watchword, but the more days that pass without another lurch lower, the better investors will feel,” said IG chief market analyst Chris Beauchamp.
In her speech to parliament, Mrs May, the prime minister, had helped sterling by not restating her September stance that “no deal is better than a bad deal”, said Mr Beauchamp, with a “generally upbeat gloss put on what was, by all accounts, a fairly stormy encounter in Brussels”.
Fiona Cincotta, senior market analyst at City Index, said that shares in UK defence firm BAE Systems were hit amid the dispute between Saudi Arabia and western governments over the alleged killing in Istanbul of Washington Post columnist Jamal Khashoggi, a critic of the Saudi kingdom.
Brent for December settlement rose 5c to $80.48 a barrel on the London-based ICE Futures Europe exchange. It traded at a $9.27 premium to West Texas Intermediate grade for the same month.
Oil surrendered most of its early gains after tensions appeared to ease between the US and Saudi Arabia amid growing international outrage over the disappearance of one of the kingdom’s most prominent critics.