Pound Faces Jolt as Local Elections Give Impetus to Brexit Talks

(Bloomberg) -- The pound has climbed on optimism over a way forward on Brexit and next week may give the currency a decisive push, strategists say.

Sterling ended its best week in two months with a rally on Friday, following a battering in local elections for the two main political parties that could push them toward a Brexit compromise. The pound could either gain past $1.32 if an agreement is struck between the ruling Conservatives and the opposition Labour party, or fall back to $1.29 if Prime Minister Theresa May’s talks fail.

Pound Faces Jolt as Local Elections Give Impetus to Brexit Talks

“Currently, cross-party talks are not making progress, but by the middle of next week expectations are that the government will make it a ‘take-it-or-leave-it’ moment for both sides to try and find a way through,” said Jordan Rochester, an analyst at Nomura International Plc. “If they were to find an agreement this would send the pound much higher as the market would price out any hard Brexit risk for October.”

Sterling surged above $1.31 Friday to head for its biggest weekly gain since March, yet is still well below its post-Brexit highs of around $1.43. Bets on pound gains over one month in options markets have turned positive for the first time in a year.

Investors are pinning their hopes for a resolution on the discussions between the two main parties, almost three years since the vote to leave the EU. The Tories and Labour both lost ground in local elections Thursday amid frustration over Brexit, which makes it in their interest to strike a deal. May and Labour leader Jeremy Corbyn both said that the message from the election was to sort out Brexit.

Pound Faces Jolt as Local Elections Give Impetus to Brexit Talks

The outlook for the Bank of England’s interest-rate path also depends on Brexit. The market barely reacted Thursday to comments from BOE Governor Mark Carney that policy makers would raise rates by more than investors are pricing if Brexit goes smoothly.

Even though any agreement in the talks would have to get through Parliament, the pound would still gain further on the news, according to Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce. A “systematic failure” would have a similar impact in the opposite direction, pushing the pound down toward $1.29.

The cross-party talks are due to resume on Tuesday. Traders will also have U.K. growth figures in their sights next week, with gross domestic product expected to pick up to 0.5 percent in the first quarter, from 0.2 percent in the last three months of 2018.

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