Sterling rose against a broadly weaker dollar on Wednesday after three days of losses as British Prime Minister Boris Johnson headed to Brussels for dinner with the president of the European Commission in a last-ditch attempt to avoid a no-deal Brexit.
With only weeks to the end of the Brexit transition period on Dec. 31, traders are hopeful that a face-to-face meeting between Johnson and Commission chief Ursula von der Leyen can break the deadlock.
In a week marked with high volatility, the British currency fell to a near three-week low on Monday as leaders failed to resolve their differences in the broader trade talks, raising concerns of a no-deal Brexit.
Britain formally left the EU in January, but remains in the EU’s single market and customs union until a transition period ends on Dec. 31. Failure to agree a post-Brexit trading deal would snarl borders, shock financial markets and sow chaos through supply chains.
But Tuesday offered a glimmer of hope when Britain said it would drop clauses in draft domestic legislation that breach an already agreed Brexit divorce settlement after reaching an “agreement in principle” with the EU over a sticky negotiating point.
Sterling rose 0.7% against the dollar on Wednesday in volatile trading to $1.3452 by 1057 GMT. It hit the highest intraweek level and headed towards a 2-1/2 year high of above $1.35 touched last Friday.
Against the euro, sterling was 0.6% higher at 90.09 pence, after falling to a seven-week low on Monday.
But in a sign that the latest markets moves were more of an indicator of panicky trading, overnight implied volatility gauges – a measure of expected price swings – rose to close to 25%, touching the highest point since late March.
“The jump in implied volatility does suggest there has been a fall in confidence regarding the prospects for a deal,” said Jane Foley, head of FX strategy at Rabobank.
“That said, after the recent selling pressure on the pound, some speculators are clearly viewing PM Johnson’s trip to Brussels in a positive light and are reducing short positions,” she added.
Ahead of the meeting in Brussels, one of Johnson’s most senior Brexit-supporting ministers, Michael Gove, told BBC radio on Wednesday that Britain sees scope for a compromise on some of the sticky negotiating points.
German Chancellor Angela Merkel said the EU and Britain could still reach an agreement on a Brexit trade deal but added that she could not guarantee there would be a breakthrough at an EU summit on Thursday.
“The ‘now or never’ moment is here,” said ING analysts in a note to clients. “The meeting will tell us a lot”.
– Reuters