Sterling jumped to a one-week high on Thursday after Britain and the European union agreed on a text setting out their post-Brexit ties that can be endorsed by EU leaders at a summit.
The pound rose as much as one per cent versus the dollar after the text was sent to EU governments stating that both parties will have “a trading relationship on goods that is as close as possible.”
Britain is due to leave the EU on March 29, 2019 and diplomats are trying to complete a divorce deal so that EU leaders can rubber-stamp it at a summit on Sunday.
“The pound is pushing higher on short covering,” said Neil Jones, head of hedge fund FX sales at Mizuho in London.
“The latest Brexit headlines are encouraging demand and there is probably some further upside (for the currency) right now,” he added.
May will make a statement on Brexit to parliament and return to Brussels on Saturday where all EU leaders are due to meet to approve the outline of their future relationship.
Brexit negotiations and political uncertainty in Britain remain the key drivers for the pound, and many analysts are cautious about its prospects.
“It won’t take long before we refocus on the challenge facing the Prime Minister in getting House of Commons support for her Brexit deal,” said Societe Generale strategist Kit Juckes.
The pound was up one per cent at $1.2928 at 1100 GMT, its highest since a rally last week. It also strengthened 0.7 per cent against the euro to 88.41 pence
Britain’s FTSE 100 shares index hit a session low as sterling rallied and British gilt yields rose to their highest since Nov. 14 at 0.77 per cent.
Growing opposition to May’s draft arrangement has hit sterling hard in recent weeks, pulling it down nearly three per cent from a Nov. 7 high of $1.3176.
Outstanding issues include a Spanish threat to block the so-called political declaration over Gibraltar and problems from other states on fishing rights and future trade ties.
The draft text secures no improvements for Britain to proposed future trading relations in financial services with the EU.
A transition period, which Britain and the EU hope will begin once Britain leaves the EU in March, can be extended “for up to one or two years,” according to the draft declaration.