Pound Set to Gain as Mood Swings Toward Brexit Divorce Deal

(Bloomberg) -- The pound’s jump at the start of November gave investors a hint of what may happen if there’s a Brexit deal in coming weeks.

Sterling could “blast through” $1.35 within two days if a divorce is agreed between Britain and the European Union, according to Mizuho Bank Ltd.

The currency jumped about 2 percent Thursday to close above $1.30 after the Times said U.K. banks may be given access to European markets, even as officials denied it. The pound gained as much as 0.7 percent Monday following a Sunday Times report that Prime Minister Theresa May had secured concessions from Brussels to let her keep all of Britain in a customs union with the EU.

The pound may recoup about half of its more than 10 percent decline from pre-Brexit vote levels if there is a divorce deal, according to a Bloomberg survey last month. Trader positioning on the currency is heavily short as missed deadlines in negotiations increased concern in recent months that there may be no deal.

“What we saw is a taste of what we could have if there was a deal on the table,” said Jane Foley, head of currency strategy at Rabobank in London. “If we got a headline like the one in the Times then it’s going to be sudden,” she said on Friday.

The chances of getting a deal appear to be improving, though the Irish border is still a big outstanding issue. The Financial Times said late last week a new proposal from the European side is on the table and Brexit Secretary Dominic Raab visited the Irish border Friday. Raab also raised the prospect of a deal by Nov. 21 in a letter to lawmakers.

If parliament approves any agreement, sterling could appreciate to $1.40, Mizuho’s head of hedge-fund sales Neil Jones said.

Turnaround Time

The positive headlines have led investors to bring forward expectations for a Bank of England interest-rate increase to November next year, with Morgan Stanley seeing one as soon as February if there’s an earlier agreement. The BOE’s policy statement Thursday flagged the potential for the economy to run hot by late 2019, though cautioned its forecasts are dependent on the Brexit outcome.

Hedge funds are buying the pound again, according to three traders in London and Europe, while sentiment in the options market over the next two months is the least bearish since September. U.K. stocks rallied last week, while government bonds fell.

This week will see traders contend with U.K. data, as services figures come Monday and then production, trade and economic output data Friday. If last week’s price action is anything to go by, even data misses will be ignored if there is positive Brexit news.

Still, the road to any deal is likely to be bumpy. Sterling will continue to be headline-driven over the next few weeks with the recent swings highlighting the “volatility that is possible on continued political uncertainty,” Rabobank’s Foley said.

While political pundits debate what kind of relationship Britain will have with the EU, strategists say it doesn’t matter for the U.K. currency. The pound may strengthen more than 5 percent to 83 pence per euro on any divorce deal, according to Nordea Bank AB analyst Andreas Steno Larsen.

“If we get a deal, almost no matter the content, the pound is cheap,” Larsen said.

©2018 Bloomberg L.P.