Pound rallies on optimism that Brexit trade talks may succeed

The pound surged the most in six months on speculation this week’s Brexit trade negotiations could deliver a breakthrough and shield Britain from a messy rupture from the European Union.

Sterling outperformed major currencies to rise as much as 1.4% to $1.2930, the biggest rise since late March, as investors digested a more conciliatory tone from officials on both sides.

“Sterling is benefiting into the start of the week from mildly positive tone ahead of Brexit negotiations,” said Jeremy Stretch, head of G-10 currency research at Canadian Imperial Bank of Commerce in London. “The general risk-on tone is also good for sterling.”

Britain risks crashing out of the EU’s single market without a trade accord at year-end if a deal isn’t reached. The EU’s chief Brexit negotiator Michel Barnier and his British counterpart, David Frost, will hold a final round of scheduled discussions starting Tuesday.

If they make enough progress by Friday, they could embark on a two-week period of intense discussions—the so-called Brussels “tunnel”—to hammer out an accord in time for a summit of European Union leaders on Oct. 15.

A trade deal could push the pound up by nearly 2% to 0.89 pence per euro in October, whereas failure to reach agreement could send it down to 92 pence, said Jane Foley, head of foreign-exchange strategy at Rabobank in London. However, “even if there is a deal there are likely to be several gaps and this could cut short any relief rally,” she said.

This week’s round of Brexit talks appear to be fueling optimism among hedge funds, according to a Europe-based trader. This is reflected by one-month bearish bets retreating from the highs they saw in mid-September.

The outlook for the pound has also improved after the European Union enabled banks to keep using London’s clearing houses next year, helping to avoid a cliff-edge scenario for financial services.