Pound jumps after UK-EU agree to go extra mile in Brexit talks

Sterling climbed after UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen agreed to go the "extra mile". PHOTO: AFP

SYDNEY (BLOOMBERG) - The pound rose after the UK and the European Union (EU) said they will continue talking about a trade agreement, keeping hopes for a late deal alive.

Sterling climbed as much as 1.2 per cent to US$1.3384 as of 6:41am in Sydney on Monday (Dec 14), after UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen agreed to go the "extra mile" and keep working on a post-Brexit accord. The duo had earlier said that negotiators had until Sunday to come up with a deal.

With less than three weeks until Dec 31, the date when the transition period for the UK's departure from the EU officially ends, many investors had hoped for a breakthrough by Sunday - or alternatively clarity that Britain would indeed exit the bloc without a deal. Instead, they must prepare to parse yet more Brexit headlines amid choppy trading, with liquidity likely to get worse as the holiday season nears.

"The mere continuation of talks and the lack of immediate selling spurs some short-covering, but it means little besides a reflection of market psychology," said Marc Chandler, chief market strategist at Bannockburn Global. "If these talks fail, my bet would be that there will be an effort to restart them next year," he said, adding "deadlines don't matter."

The Australian dollar popped higher with its New Zealand counterpart as forex traders returned to their desks, with optimism the talks could yet yield a deal spurring a mildly risk-on tone. Sterling was bought heavily against the euro as traders moved to adjust positions after the pair gapped lower at the open. The common currency slipped as much as 1.1 per cent versus the pound.

The EU's chief negotiator, Michel Barnier, will brief ambassadors of the bloc's 27 countries in Brussels on Monday.

If a trade agreement isn't struck by the end of the year, decades of free movement of goods, services, people and capital will come to an abrupt end. British firms would revert to trading with the EU under rules established by the World Trade Organization in 1995. That means imports and exports to the EU would be subject to WTO-negotiated tariffs - essentially a tax on goods.

Such a scenario could push the Bank of England to cut interest rates below zero for the first time ever, BofA Global Research said earlier this year. Bloomberg Economics estimates Britain's economy would suffer a near-term shock of around 1.5 per cent of output.

Many bank strategists predicted that talks would indeed continue; market participants have become hardened to countless missed deadlines and last-minute talks around Brexit in recent years.

Still, that hasn't stopped traders taking precautions to limit their exposure in recent days. The cost to hedge swings in the pound on Friday was the highest since the pandemic-induced market turmoil of March -- a spike only exceeded in the past five years following the 2016 Brexit referendum itself.

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