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Abu Dhabi, UAEFriday 16 November 2018

Pound gains on reports of Brexit deal for UK financial sector

Financial services firms said to be granted continued access to European Union markets after Britain leaves European Union

The pound has strengthened against the dollar on what is said to deal for UK financiers post-Brexit. EPA
The pound has strengthened against the dollar on what is said to deal for UK financiers post-Brexit. EPA

The pound surged and gilts fell after The Times reported Brexit negotiators have tentatively agreed to give UK financial services companies continued access to European Union markets after Britain leaves.

Sterling rose as much as 1.1 per cent and UK government bonds dropped for a second day as the prospect of a full Brexit agreement was seen reducing economic uncertainty. That is bringing forward expectations for an interest-rate hike to next year, just before the Bank of England announces its latest policy decision and inflation outlook later Thursday.

“The pound has strengthened sharply during the Asian trading session driven by renewed optimism that the EU and UK are closer to a Brexit deal than widely feared,” said Lee Hardman, an analyst at MUFG. “The positive Brexit headlines have provided a more supportive backdrop for the pound heading into today’s BOE policy meeting.”

The pound was up 1.1 per cent at $1.2905 by 8.30am in London, with 10-year gilt yields two basis points higher at 1.46 per cent. The currency had briefly jumped on Wednesday and gilts were put under pressure after a letter was published showing UK Brexit Secretary Dominic Raab expected a deal to be finalised by November 21.

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The optimism over Brexit negotiations may complicate matters for gilt traders and BOE governor Mark Carney ahead of the policy meeting Thursday. UK money markets have moved forward their pricing for the next rate hike to November 2019, from February 2020 on Tuesday. That is still later than markets were expecting just a month ago amid increased fears of a no-deal Brexit.

“The BOE governor will likely reiterate his warning about the very damaging growth impact of a ‘no-deal’ Brexit,” said Credit Agricole head of G10 currency strategy Valentin Marinov in a note.

“Given that pound sentiment has taken quite a beating of late, Carney’s comments could reverberate strongly and keep the latest bounce in the pound to the test.”