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Sterling gains on Brexit optimism

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Sterling reached its best level against the euro since February. Reuters

(Reuters) – Sterling gained on Monday ahead of a pivotal week in which Britain expects to agree a transition deal with the European Union for the period immediately after it leaves the bloc, and the Bank of England announces its rate decision after crucial inflation and wages data.

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Sterling pushed to its best level against the euro since Feb. 28, rising 0.2 percent to 87.95 pence per euro, as optimism for a Brexit deal grew.

Market analysts mostly expect Britain will secure a transitional agreement at Thursday’s EU summit – which could mean little change in trading between the UK and the EU bloc for around two years after Britain leaves next year.

Question marks over a transition deal have hung over sterling, not least because securing one would allow both sides to focus on the tougher task of hammering out what sort of trading relationship they will have after Britain leaves.

“There is a lot of optimism about the transition deal. The market thinks it’s a done deal and the general expectation is that a deal is going to be contingent on the Irish border issue,” said Alvin Tan, an FX strategist at Societe Generale.

Despite optimism for a transition deal, a deadlock over Irish border arrangements could still derail any agreement.

Sterling rose 0.2 percent against the dollar to $1.3971. The pound last week flirted with the $1.40 mark but failed to break through it and head towards the $1.43 levels it hit in January when a dollar sell-off gathered steam.

“The pound appears poised to strengthen further in the week ahead if a transition deal can be reached at the upcoming EU Leaders Summit,” said MUFG analysts in a note.

“The meeting today between the EU’s chief Brexit negotiator (Michel Barnier) and his UK counterpart, David Davis, could provide the clearest signal over whether a transition deal is likely to be agreed this week.”

Later this week the Bank of England monetary policy meeting is expected to keep rates on hold but prepare the market for a possible rate hike in May, an increase it has signalled is contingent on a transition deal being agreed.

Analysts do not expect the BoE to serve up any surprises, but will be looking at both consumer price inflation data, due on Tuesday, and wages data due on Wednesday for any sign of inflationary pressures building in the economy.

“We suspect a frenetic week could be in store for British pound markets as Brexit and Bank of England policy risks clash head-on,” ING’s Viraj Patel said.

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