LONDON (Reuters) - Sterling rebounded from a six-day low against the euro on Tuesday to trade flat on the day, with investors cautiously optimistic that a deal on opening up talks on post-Brexit trade would be reached by the end of the week.
Britain said it was a confident of a deal on Brexit just hours after a tentative agreement with the European Union over the Irish border was dashed by Prime Minister Theresa May’s kingmakers in Belfast.
After a tumultuous day on which a choreographed attempt to showcase the progress of Brexit talks was thwarted at the last minute, prompting a sell-off in the pound, May will try to gauge on Tuesday what her supporters in Northern Ireland’s Democratic Unionist Party (DUP) might accept.
“While we are all a little bit confused and trying to figure out how far this DUP veto will go and how long they’ll drag their heels for, the base case for us is that progress is made by the December summit,” said Nomura currency strategist Jordan Rochester, referring to the EU summit on Dec. 14-15.
May, who is now scrambling to thrash out a deal with the EU while keeping the DUP, which props up her minority government, and her own party onside, may return to Brussels as early as Wednesday to continue talks, a Downing Street official said.
“On Friday at the latest we expect a meeting between May and Juncker. If that meeting takes place, it means the DUP has given the green light. We’ll probably hear that from the DUP first and that will move the market (and sterling higher),” Rochester added.
Sterling was trading flat at 88.08 pence per euro by 1510 GMT, having earlier weakened to 88.68 pence per euro.
Against a broadly stronger dollar, it was still down a third of a percent at $1.3434, but well above its earlier lows of $1.3370.
BNP Paribas currency strategist Sam Lynton-Brown said the market was pricing in a positive outcome from the EU summit, and that sterling looked vulnerable.
“What we’re likely to see on an announcement (of a deal) is sell-the-fact price action,” he said. “The market is already positioned with a small net long position and the likelihood of them wanting to build that position out further is small.”
Data showing Britain’s dominant services sector lost speed in November as prices charged by companies rose at their fastest pace in nearly 10 years - potentially adding to the country’s inflation problem - had little impact on the pound, with focus squarely on Brexit developments.
Reporting by Fanny Potkin and Jemima Kelly,; Editing by Saikat Chatterjee and Ed Osmond