Sterling climbed from the day’s lows on Wednesday after a source close to the EU-UK Brexit talks said a trade deal is difficult but still possible and talks will continue in the coming weeks.
The British pound had earlier retreated on uncertainty over whether Britain and the European Union will reach a Brexit deal before their self-imposed Thursday deadline at the EU Summit.
Sterling’s implied volatility gauges soared to a seven-month high of more than 13% indicating investors were prepared for unexpected moves in the British currency in the next hours.
British Prime Minister Boris Johnson and the head of the European Commission, Ursula von der Leyen, will talk about the progress of the Brexit negotiations on Wednesday afternoon.
Sterling was last up 0.1% at $1.2954, having touched a one-week low of $1.2865. It rose 0.2% against the euro to 90.61 pence after hitting a five-day low of 91.21 pence.
“The chances of no deal are still appreciable, but I continue to think that this would be more by accident than design,” said UBS economist Dean Turner.
“But through all the noise, we should stick to one thought: it is in neither side’s interests not to have a deal.”
The two chief negotiators, the EU’s Michel Barnier and Britain’s David Frost, say they are inching towards a deal, though they have underscored that important gaps remain on fishing, issues over a level playing field and governance.
Frost is due to tell Prime Minister Johnson after the EU summit on Thursday and Friday if he thinks it is worth continuing the talks and whether a deal is possible.
EU leaders meeting in Brussels on Thursday and Friday to discuss Brexit will say that progress in talks with Britain is “still not sufficient” to seal a new trade deal, according to a draft summit decision seen by Reuters.
The EU would prefer to have a Brexit deal but is prepared for the eventuality that no agreement can be reached, the Commissioner for the EU’s single market, Thierry Breton, told BFM business radio on Tuesday.
MUFG’s head of research, Derek Halpenny, said the focus on fisheries, one of the last remaining sticking points in the talks, suggests a final deal was close.
However, any agreement is likely to be far removed from what analysts had initially hoped for, limiting gains for sterling even if a deal is signed.
“We are only arriving at the possibility of a deal due to its being very narrow in scope … There is set to be considerable disruption and frictions on trade that may well still be underestimated by markets,” Halfpenny said, adding that this is likely to curtail any post-deal appreciation for the pound.