Brexit and the Pound

The European Union appeared to reach broad agreement on a post-Brexit transition period and the Irish border, leading to a surge in the pound. Sterling pushed to its best level against the euro since Feb. 8, rising as much as 0.6 per cent to 87.55 pence per euro, as talk of an agreement filtered out of a meeting between Britain’s Brexit minister, David Davis, and EU chief negotiator Michel Barnier.

Barnier says the EU and Britain have agreed on a large part of the treaty that will govern the U.K.’s departure from the bloc next year. All movement forward toward a smooth exit will only help the pound. The transition period that was agreed upon to help ease Britian out of the EU also helped.

This is the first time since February 26 th that, against the dollar, sterling has breached the $1.40 mark, rising 0,6 per cent to $1.4048.

An analyst at ING said “people are expecting something positive and they have been positioning ahead of it.” He said that pound could rise as high as $1.43 if economic data also support sterling.

Sterling faces a pivotal week, with the Bank of England announcing an interest rate decision on Thursday after crucial inflation and wages data. Market analysts had mostly expected Britain to secure a transition agreement at Thursday’s EU summit. That would mean little change in trading between the UK and the EU bloc for around two years after Britain leaves next year.

“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.

The Bank of England monetary policy meeting is expected to keep rates on hold but prepare the market for a possible increase in May, an increase it has signaled is contingent on a transition agreement.

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

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