Pound jumps as traders look for endgame to U.K.-EU trade talks

The pound rallied the most in more than a week, as speculation grows British and European officials are getting closer to striking a trade deal.

Sterling rose as much as 0.9% to $1.3441, extending gains after Times Radio’s Political Correspondent Tom Newton Dunn wrote on Twitter that both sides have entered the so-called tunnel in Brexit trade talks, a period of intensive negotiations that forms the precursor to any deal, without saying how he got the information.

While negotiators have been in this phase of Brexit talks for several weeks, the jolt higher in the pound shows how eager traders are to jump on signs an agreement is in reach. With time running short to ratify any agreement before the transition period ends on Dec. 31, momentum is building for a pact.

“The pound is now likely to price a higher chance of a deal on this tunnel headline,” said Jordan Rochester, a currency strategist at Nomura International Plc. “I am hopeful it’s done by Friday, too.”

Irish Prime Minister Micheal Martin told the Irish Times he’s hopeful for a Brexit deal by the end of the week, echoing similar comments by French European Affairs Minister Clement Beaune.

The pound’s advance on Tuesday comes after a 2.9% gain last month, the best November for the currency since 2006. It was spurred by relief the U.K. and EU seemed willing to negotiate a deal and on optimism over the developments of several Covid-19 vaccinations.

Meanwhile, the Bloomberg Dollar Spot Index suffered its worst November on record and fell below 1140 for the first time since 2018. The gauge dropped as much as 0.7% as of 4:40 p.m. in London.

The base case scenario for markets is that the U.K. and EU will have a trade agreement of sorts. That’s why analysts in a Bloomberg survey last month said the pound will likely rise to $1.35 by mid-2021 in the event of a Brexit trade deal, a relatively small move compared to the 5% drop they anticipate if negotiations fall through.