February 20, 2018 / 10:59 AM / 9 months ago

UPDATE 2-Sterling strengthens on hopes Britain, EU can agree Brexit deal

* Sterling reverses losses after report on EU Brexit stance

* Traders prepare for crucial earnings data on Wednesday

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Updates prices, adds details, quotes)

By Tommy Wilkes

LONDON, Feb 20 (Reuters) - Sterling recovered against the dollar and rose against the euro on Tuesday after a media report said the European Parliament would call for giving Britain “privileged” single market access.

Growing hopes that Britain and the European Union can agree a transition deal, and then terms for the UK that allow it to remain as close as possible to the trading bloc, have helped support sterling this year.

According to Business Insider, the European Parliament is preparing to call for a more flexible approach in future relationship talks with Britain, a break from the position put forward by chief EU negotiator Michel Barnier.

Speaking in Vienna on Tuesday, Britain’s Brexit Minister, David Davis, said Britain and the European Union could reach a deal to access each others’ markets”.

“We are starting to hear some of these small murmurs that things are moving towards a middle ground...a mutually beneficial Brexit,” said Viraj Patel, London-based FX strategist at ING.

Britain, which is due to leave the EU next year, says it will agree a transition accord with the bloc by end-March.

Barnier said earlier this month that a transition deal was “not a given”, suggesting the two sides remained far apart.

The EU summit in late March is expected to prove crucial for the progress of Brexit negotiations.

The pound, which had been down 0.3 percent against the dollar at $1.3953 before the Business Insider story, jumped to the day’s high of $1.4015, up 0.2 percent. It later traded slightly higher at $1.4005 at 1630 GMT even as the dollar extended its rally against other currencies.

Against the euro, the pound rallied half a percent to 88.115 pence per euro and held on to those gains in later European trading.

Patel at ING said the pound was changing hands in a “new Brexit trading environment”, rising on the back of positive surprises more than falling when talks seemed very strained, as they did last year.

EARNINGS DATA

Growing expectations that the Bank of England is at the start of a long interest rate hiking cycle also mean that the pound is increasingly impacted by factors other than Brexit talks.

Traders are looking to important British earnings data due on Wednesday that could help cement bets that the central bank will hike rates in May.

BoE Governor Mark Carney said this month that rates needed to rise a bit faster and more than previously expected, and the market now prices in a roughly 80 percent chance of a May hike.

“We would need to see a significant negative miss to see the market re-price the chances of a May hike,” said Morten Helt, a strategist at Danske Bank in Copenhagan, referring to the earnings data released on Wednesday.

The level at which British workers are being paid is crucial, given that the BoE has said it wants to see evidence of rising wage pressures before it embarks on further rate increases. (Reporting by Tommy Wilkes; Editing by Jemima Kelly and Mark Heinrich)

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