January 22, 2018 / 10:12 AM / 7 months ago

Sterling rises towards $1.40 on Brexit deal optimism

LONDON (Reuters) - Sterling climbed half a percent against the euro and dollar on Monday, nearing $1.40 and reaching its highest level since June 2016’s vote for Brexit, on optimism that Britain will reach a favourable divorce deal with the European Union.

UK pound coin plunges into water in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic

French President Emmanuel Macron said on Saturday that Britain would be able to have a bespoke deal with the trading bloc - one of Prime Minister Theresa May’s objectives - though London’s financial centre could not enjoy the same level of access to the EU under May’s current Brexit plan.

“From a market perspective, we’re used to the same old line from the EU: that the UK can’t cherry-pick,” said MUFG currency economist Lee Hardman, in London. “So any chinks of light are potentially seen as more important than the repetition of the old phrases from the past year or so.”

Sterling climbed to as high as $1.3970, its strongest since June 24 2016. Against the euro, too, which has proved more resilient against the pound in recent weeks, sterling broke through the 88 pence level to trade at its strongest in five weeks at 87.70 pence per euro.

“The price action is supportive of our view and of what we’ve been saying since late last year, which is that the risk of a no-deal, more disorderly Brexit has diminished,” said Hardman.

Data published on Friday showed speculators increased their net-long positions on sterling - or bets that it would rise - to the highest level in 3-1/2 years in the latest week, on the view that Brexit talks had so far gone relatively well and that the economy was ticking along better than some had expected.

Former Goldman Sachs economist and Treasury minister Jim O’Neill said on Monday morning that Britain’s economy was likely to do better in 2018 than many forecasts suggest and the benefits of global growth in the coming years will “easily dwarf” any Brexit hit.

But some analysts say there have been few fundamental drivers behind the pound’s 3.5 percent climb against the dollar since the start of the year, that there remains a great deal of political uncertainty, and that sterling is due a correction lower.

“With speculative long positioning close to multi-year extremes, we advise against chasing the currency higher. If anything, we remain of the view that the currency is trading in overbought territory,” said Credit Agricole currency strategists Manuel Oliveri.

Although it is still down around 7 percent since the day of the ballot, the pound is now trading higher against the dollar than during a dip four months before the EU referendum, when the currency briefly touched as low as $1.3836.

Sterling is still trading far lower than its pre-referendum levels against the euro, and is down more than 13 percent since the day of the vote.

Reporting by Jemima Kelly; Editing by Mark Potter

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