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UPDATE 2-Sterling stabilises; Brexit 'mood music' brightens

Thu, 8th Oct 2020 11:55

* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv
(Updates prices)

By Olga Cotaga

LONDON, Oct 8 (Reuters) - Sterling stabilised on Thursday as
prospects for a Brexit deal appeared to improve, with Britain
giving it a 66% chance of success.

The pound inched up towards $1.30 in early session, before
giving back those gains. Against the euro, sterling strengthened
slightly. A Bloomberg News report suggested officials might be
more optimistic than they were letting on in public.

British Prime Minister Boris Johnson and European Council
President Charles Michel agreed on Wednesday that some progress
had been made in talks on a trade deal, though significant
differences remained.

On top of that, analysts said the Bloomberg News report
suggesting that in private officials were more optimistic about
the likelihood of clinching a deal had helped sentiment.

"In any case, next week's EU Council meeting is not the hard
deadline we had thought it would be but rather yet another
'stock-taking exercise'," said Marshal Gittler, head of research
at BDSwiss.

The pound was last trading flat against the U.S. dollar at
$1.2920 and up 0.2% versus the common currency at 90.88
pence.

The week has proven volatile for the British currency with
contradictory Brexit headlines flying around as Britain and the
EU negotiate their future relationship.

An overnight rise in implied volatility gauges to a
two-month high of above 12% in sterling, suggested traders were
prepared for more unexpected moves as talks continue
.

"The improving mood music surrounding the Brexit talks is
encouraging a stronger pound," said Lee Hardman, currency
analyst at MUFG. However, coronavirus concerns could cap the
currency, he added.

"The more severe the lockdown becomes the more likely
positive Brexit developments will be overshadowed," he said.

The British government is considering additional local
COVID-19 restrictions for parts of northern England as the
second wave of infections accelerates.

Bank of England Governor Andrew Bailey said he did not
expect the new wave to be as damaging as the first and voiced
optimism about the Brexit deal's prospects.

He also said the central bank was ready to use its policy
firepower to limit the impact of a second wave.

Bank of America analysts said "investors are under-pricing
no-deal risks".

"Though a deal remains our base case we argue that this is
no longer the binary outcome for the pound that it was once,"
the analysts said, giving as explanation that "UK red lines
prevent a deep and comprehensive relationship with the EU" and
that a deal would still represent a hard Brexit.
(Reporting by Olga Cotaga
Editing by Tomasz Janowski, Raissa Kasolowsky and Alison
Williams)

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