LONDON (Reuters) - Sterling had a turnaround of fortunes towards the end of the European session on Wednesday, rising as much as 0.6% against a weaker euro, with investors seeing some room for cautious optimism over the impending Brexit deadline.
Sterling had been falling for the fifth consecutive day against the euro and was at nearly two-month lows against the dollar for much of Wednesday, as the looming risk of a no-deal Brexit, talk of negative rates, and new UK lockdown measures all weighed on the currency.
Kenneth Broux, FX strategist at Societe Generale, said that the turnaround was likely to be due to technical factors as cable approached key levels, but that there was also some “cautious optimism” from the fact the European Union chief negotiator Michel Barnier is in London for informal talks.
Barnier said that he is determined to get a deal, and senior UK cabinet minister Michael Gove separately said that he is confident that Britain can overcome its difficulties to secure a free-trade deal with the EU.
At 1512 GMT, sterling was at $1.2769, up 0.3% since New York’s close, having hit a two-month low of $1.2676 earlier in the session.
It has lost 4.5% so far in September, making this the pound’s worst month since 2016.
Versus the euro, it was up around 0.5%, at 91.47 pence per euro, having reached as strong as 91.365 pence per euro as the single currency weakened to its lowest since July 27.
But the outlook remains bleak for sterling.
Prime Minister Boris Johnson ordered restaurants and bars to close early and told British people to work from home where possible, in new measures which he said could last for six months.
British PMI data indicated the recovery from the first coronavirus lockdown lost momentum in September.
“The UK upswing will moderate sharply in the months to come – rising Brexit risks will reinforce the slowdown,” wrote Berenberg economists Holger Schmieding and Kallum Pickering.
UBS Global Wealth Management wrote in a note to clients that a no-deal Brexit cannot be ruled out and would push the pound down to $1.25.
Analysts also say the possibility of negative rates is a downside risk for sterling.
Bank of England Governor Andrew Bailey said on Tuesday that the Bank’s latest policy statement did not imply it would necessarily use negative interest rates, and that observers should not read too much into it.
Reporting by Elizabeth Howcroft; Editing by Barbara Lewis and Lisa Shumaker
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