Pound, Gilt Traders Face Ticking Clock to October EU Summit

(Bloomberg) -- The pound benefited in recent days from optimism that Britain and the European Union are getting closer to a Brexit deal, but this week could test that view.

An October EU summit is fast approaching and the U.K. must submit a proposal on the contentious Irish border issue by Wednesday to allow envoys of the bloc to begin preparations ahead of the meeting. Any confirmation that the two sides will be able to work out their differences would push the pound higher and fuel a further slide in gilts, say strategists and fund managers.

Pound, Gilt Traders Face Ticking Clock to October EU Summit

The EU is set to offer the U.K. a free-trade deal deeper than any agreement that’s gone before, but will reject Prime Minister Theresa May’s demand for “frictionless trade,” according to EU diplomats. The bloc’s vision for future ties with Britain will contain “about 30-40 percent” of May’s pitch for a wide-ranging trade and security deal, two of the diplomats said.

“The mood music is clearly more positive but this is the first of three possible summits where we can agree the withdrawal agreement and the outline of the future relationship,” said Investec Asset Management portfolio manager Russell Silberston. “I’m not sure anything else matters for the pound.”

Sterling slipped 0.5 percent versus the dollar Monday, paring the 0.7 percent gain last week after May’s successful navigation of her Conservative Party’s annual conference boosted optimism in her ability to clinch a deal with the EU. Still, May’s dependence on Northern Ireland’s Democratic Unionist Party for her majority in Parliament could still put a spanner in the works, according to Commerzbank AG strategist Thu Lan Nguyen.

“The pound’s recovery potential will remain limited until we clearly get one of the parties to back down on its ‘red lines’,” she said. “Therefore, I would expect the downtrend in euro-sterling to now slowly fade out, or at least, it will be driven further by euro weakness, not by pound strength.”

As for U.K. government bonds, yields will likely be driven higher as part of the broad sell-off unfolding across global debt markets, while investors will be watching the results of a syndication due early in the week. The market will also be looking out for the August trade balance data and industrial production figures due Wednesday.

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