November 29, 2017 / 10:30 AM / 14 days ago

Brexit hopes kick sterling to 2-month highs

* Graphic: sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Saikat Chatterjee

LONDON, Nov 29 (Reuters) - Britain’s sterling jumped to a two-month high on Wednesday as investors greeted news reports that Britain and European Union had agreed the outlines of a Brexit settlement bill potentially paving the way to a future trade pact.

Even as the British currency topped the $1.34 line for the first time since October, some investors were wary of rushing in to buy the pound until more details emerged from a EU summit on Dec 14-15.

“There is a lot of water that has to flow under this particular bridge before we see investors becoming optimistic about the pound in their portfolios,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

Sterling jumped 0.5 percent to $1.3431 on Wednesday, extending a late Tuesday rally in New York trading hours after media reports on the offer, which British newspapers valued at around 50 billion euros.

The offer reflected the bulk of outstanding EU demands that include London paying a share of post-Brexit EU spending on commitments made before Britain leaves in March 2019 as well as funding of EU staff pensions for decades to come.

Stephen Gallo, European head of FX strategy at BMO Financial Group in London said sterling may be heading up to the $1.40 line over the next 6-12 months though furthe progress needed to be seen on trade and transition agreements.

Reflecting the sudden optimism, euro weakened to a three-week low against sterling to 88.55 pence in early trades.

Despite sterling’s jump since Tuesday, sterling remained well below a 2017 high of $1.3659 hit in late September and more than 11 percent below the June 2016 Brexit vote of $1.5022.

Market positions on sterling remained broadly light with latest CFTC data showing investors remained broadly neutral on the British currency while other longer-term surveys on central banks showed underweight reflecting Brexit-related concerns.

However, the Irish border issue remained a key risk for Brexit talks to move ahead next month.

“If Dublin were to argue in December that the Brexit divorce discussions had not yet yielded sufficient progress, they could prevent talks moving forward,” Kallum Pickering, senior UK economist at Berenberg, wrote in a note.

A trade-weighted index of the British currency jumped 1.4 percent to 78.3 in early trading on Wednesday. (Reporting by Saikat Chatterjee; Editing by Angus MacSwan)

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