The pound has climbed to its highest level in almost two months against the dollar amid hopes that progress on Britain’s divorce settlement with the European Union will smooth the way for the start of trade talks.
With fears receding that the UK would leave the EU in March 2019 without a trade deal, currency investors pushed sterling higher against both the dollar and the euro on Wednesday.
An overnight rally on Wall Street was followed by further gains in European trading. The pound was up 0.67% on the day against the dollar at $1.34, and 1.5% up on its low point on Tuesday, before news emerged of a potential breakthrough in the long-running discussions about money between London and Brussels.
Some City analysts warned, however, that the pound’s rise would be capped by concerns that the talks could still be derailed in the weeks and months ahead by differences over the amount Britain intends to pay and by the concessions on trade that the EU would be prepared to make.
Jordan Hiscott, chief trader at ayondo markets, said: “The negotiations are yet to be officially agreed, and I suspect many hard Brexit advocates from the Conservative party will baulk at the idea of paying the €60bn, with the possibility of further remunerations at a later stage, rumoured to be £80bn-£90bn.”
The rise in the value of the pound, if sustained, would lead to cheaper imports and lower inflation, but would make UK exports less competitive.
Despite sterling’s jump over the past two days, it remained well below the highpoint for 2017 of $1.3659, which it hit in late September, and more than 11% below the $1.50 level at which is was trading before the JEU referendum in June last year.
Stephen Gallo, European head of foreign exchange strategy at BMO Financial Group in London, said further progress on trade and a transition deal could push sterling to $1.40 over the next six to 12 months.