LONDON (Reuters) - The British pound firmed on Thursday and is set to score its biggest monthly rise in a year as Britain prepares to resume negotiations with the European Union over how to resolve the issue of Irish border arrangements after Brexit.
The currency has strengthened 3 percent against the dollar and 2.8 percent versus the euro in January as currency traders slashed the odds on Britain leaving the European Union without a trade deal in place.
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But Tuesday’s move by lawmakers to demand Prime Minister Theresa May renegotiate the terms of Britain’s exit sent the pound lower before the currency recouped its losses.
With less than two months to go before Brexit, investors are trying to figure out whether May’s Conservative Party rallying around her has increased the chances of her securing concessions from the EU or has pushed Britain toward further deadlock and uncertainty.
Britain will take a few days to formulate proposals to put to the European Union in an attempt to resolve the issue of Irish border arrangements after Brexit, foreign minister Jeremy Hunt told BBC radio.
The pound rose 0.2 percent at $1.3161 and not far away from a three-month high of $1.3218 hit earlier this week. For the month, it is up 3 percent against the greenback, its biggest monthly rise since January 2018.
“EU leaders have a new script that developments in London make a disorderly Brexit more likely,” said Petr Krpata, an FX strategist at ING in London.
“However this should be seen as positioning and even if May returns from Brussels empty-handed, the prospect of a fresh set of amendments being debated in London Feb 13/14th can keep GBP supported,” he added.
The renewed uncertainty over Brexit has caused money markets to reduce expectations that the Bank of England will raise interest rates in 2019. The probability is now only 52 percent, compared with 64 percent on Tuesday before the vote.
Against the euro, the pound gained half a percent at 87.12 pence, with most of its gains coming in the latter half of the London trading session after cautious comments from Bundesbank President Jens Weidmann.
Germany’s economic slump will be deeper and longer than earlier thought, and the euro zone is likely to undershoot its 2019 inflation projection, Weidmann said in an unusually gloomy outlook.
“Euro is being sold across the board, euro sterling and euro Swiss are also down on the back of comments from Weidmann who was basically signaling concern over weaker growth in Germany and inflation, given he is one of the more hawkish members of the board,” said Lee Hardman, a currency strategist at MUFG in London.
(graphic: GBP Monthly Performance link: tmsnrt.rs/2SgyC40).
Additional reporting by Sujata Rao; Editing by Toby Davis