Pound Falls as Headlines Seen Tempering Brexit Good News

Updated on
  • EU official says trade deal by March 2019 not realistic
  • Reaction suggests investors got carried away buying: Marinov

RBC's Lignos Says Many Brexit Questions Remain for Pound

The pound weakened and U.K. government bonds stayed lower as a European Union official said it was not realistic to expect a U.K. trade deal in March 2019, following a Brexit breakthrough earlier Friday as the two sides agreed to move talks on to the next stage.

Sterling reversed an earlier advance, while gilts headed for their first weekly decline in four weeks, even as the same official said talks on the transition period could start in early 2018. The U.K. currency has swung between gains and losses this week as Brexit headlines drove near-term direction. One-week implied volatility on pound-dollar, which captures a key EU summit scheduled for Dec. 14-15, rose to its highest level since June.

“This should not come as a huge surprise given the complexity of the upcoming discussions and the need for a transitional period after March 2019,” said Valentin Marinov, head of Group-of-10 foreign-exchange research at Credit Agricole CIB. “The reaction highlights that people may have gone a bit ahead of themselves buying the pound.”

The pound fell 0.5 percent to $1.3412 as of 1:32 p.m. in London, after earlier gaining as much as 0.3 percent. It weakened 0.2 percent to 87.53 pence per euro. The yield on benchmark 10-year gilts rose five basis points to 1.30 percent, extending its increase this week to seven basis points.

Sterling will likely remain vulnerable to Brexit headlines for the rest of the session, according to Neil Jones, head of hedge fund sales at Mizuho Bank Ltd. Option pricing still signals some investor skepticism over what the next stage of Brexit talks will bring, with one-month put contracts on the pound continuing to trade at a premium to calls.

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