Positive signals from London and Brussels over the trade component of EU divorce talks drove sterling higher against the euro on Thursday, though the risk of a no-deal Brexit kept the British currency well off 2018 highs.
The pound hit a one-week high against the euro, extending overnight gains and heading for its biggest two-day rise since November after the bloc’s chief negotiator said on Wednesday it was ready to offer Britain an unprecedentedly close relationship after it quits. But Michel Barnier tempered those comments on Thursday, saying on German radio that the European Union must also prepare for the possibility of a no-deal Brexit. Barnier’s comments did not depart significantly from his previous position on Brexit.
EU diplomats said his aim was to talk up the trade deal in order to entice Britain into accepting it and an Irish border emergency plan - a key sticking point in Brexit talks. “Barnier is working for a deal, he talks trade to get the Irish backstop through,” a senior EU diplomat said. With seven months to go until Britain leaves, its government has been ramping up its no-deal preparations, and negotiators on both sides increasingly expect an informal October deadline for reaching an agreement to slip into November. As the political outlook over Brexit has clouded, hedge funds have in recent weeks built short positions against the pound to more than one-year highs, meaning any slight change in sentiment towards the currency can lead to big moves.