Sterling rallied on Monday, briefly touching a 2-1/2-month high, as more positive news about a potential COVID-19 vaccine propelled investors to buy riskier currencies and investors bet Britain and the European Union would clinch a Brexit trade deal.
London and Brussels this week continue their negotiations to agree a deal on their future trading relationship, though time is now running very short as Britain’s post-Brexit transition period ends in fewer than six weeks.
Without an agreement Britain would revert to trading with the EU on World Trade Organisation rules, an outcome both sides believe would prove highly disruptive for their economies.
Most investors believe a deal will be clinched, even if it is a bare-bones one that leaves some trade discussions for later.
News on Monday that AstraZeneca’s vaccine for the novel coronavirus could be around 90% effective added to the positive mood.
The British currency rose 0.8% to as high as $1.3396, its strongest since early September before the gains faded in late London trading. It last stood at $1.3304.
Against the euro it rose more than half a percent to 88.68 pence, a near two-week high.
“There is scope for a relief rally in GBP on news that a deal has been signed, though the failure of the UK and EU to agree a comprehensive deal will likely limit upside potential,” said Rabobank strategist Jane Foley, noting that a limited, “skeleton” trade deal had been priced in to the pound.
“Since the scenario described above is a consensus view, there is greater scope for volatility in EUR/GBP if a deal is not struck. This is still possible,” she added.
Ulrich Leuchtmann, an FX strategist at Commerzbank, said an extension to the Dec. 31 transition period end-date is now likely as the two sides run out of time to forge a deal.
“The FX market is seeing it as a GBP positive sign that the negotiations are being continued in December,” he said.
The widely watched flash purchasing managers index (PMI surveys for November came in better than expected, with the composite measure touching 47.4 against a forecast of 42.5. However, any reading below 50 still represents a contraction, and the latest lockdown measures are weighing on the economy.
In a busy week for the UK, Finance Minister Rishi Sunak will unveil his spending review on Wednesday. He vowed over the weekend that there would be no return to austerity, even as the coronavirus crisis pushes Britain’s debt further above 2 trillion pounds.