By Eamon Quinn
Sterling had one of its most volatile sessions as the currency initially slumped on fears over UK Prime Minister Theresa May’s leadership but later rebounded on renewed hopes for a Brexit breakthrough.
EU chief negotiator Michel Barnier’s remarks that the Brexit document could be readied within hours helped swing sterling back against the dollar.
Against the euro, the pound traded at 87.51 pence, retracing early hefty losses.
Fiona Cincotta, senior market analyst at City Index, said sterling traders were braced for a volatile ride over the next hours.
“The outcome of Brexit depends on Theresa May’s ability to win support. Signs that she is able to draw her cabinet together behind her and the Brexit deal could see sterling push through $1.30 before opening the door to $1.315. Failure by May to get the Brexit deal through could see sterling dive back towards $1.27 resistance tested at the end of October,” Ms Cincotta said.
“Despite a heavy selloff in early trade, the pound has surged almost 100 points from its low, as investors react to Michel Barnier’s most recent comments...All that remains is for Theresa May to muster support from her cabinet. This will not be an easy task for the PM, which explains why the pound hasn’t rallied further,” she said.
Sterling has been the key financial indicator for the success or otherwise of the Brexit divorce talks ever since the UK voted to leave the EU in the referendum of June 2016.
“Provided that the UK and EU agree on a deal and politicians vote in favour of a deal in parliament, we expect sterling to rally to $1.45 by the end of next year. In our view, this is still just about the most likely scenario,” according to Capital Economics in its assessment.
“If, however, the UK parliament rejects the deal agreed between the two sides and the UK heads towards a chaotic exit from the EU, sterling may fall sharply in the short term. But there are reasons to expect that the fall would not be too large,” for a number of reasons, including that it has already fallen “a long way” in the last two years, the London-based firm said.
Prime Minister May is edging toward a deal in Brussels, but the concessions she’s making have united opposing wings of her Conservative Party against her.
And the chances of getting th UK parliament to approve the divorce deal look slimmer than ever. Both sides say there needs to be a breakthrough by tomorrow if a deal is to be signed off at a summit this month.
Mr Barnier said the parameters of the deal have been clarified, but it’s not done yet, while a UK official has said the British cabinet isn’t expected to be presented with a deal at its meeting today.
In a sign that Brexit talks could go down to the wire, EU sources said they want clarity from London by the end of tomorrow at the latest if there is to be a summit this month to approve a Brexit deal.
Meanwhile, German Finance Minister Olaf Scholz said he expected Italy to take steps to resolve a row with EU authorities over its 2019 budget and he was “quite optimistic” about a solution to the dispute.
The European Commission rejected the draft fiscal plan last month and has threatened to impose penalties if it is not revised to conform with EU regulations.
Additional reporting Bloomberg and Reuters