Pound Pares Gain as EU, U.K. Downplay Prospect of Deal Wednesday

(Bloomberg) -- The pound fell from a five-month high as European Union and U.K. officials downplayed the prospects of a deal Wednesday night out of last-ditch Brexit negotiations.

There are signs an agreement can be reached, but a sticking point remained how to redraw a customs border with Ireland. Talks are continuing, and EU Chief Negotiator Michel Barnier told the bloc’s envoys the outstanding technical issue is how to collect Value Added Tax in Northern Ireland if the U.K. decides to have a different rate from the EU after Brexit, an official said.

Sterling touched its strongest level since mid-May earlier Wednesday after surging the most since 2008 in the past four days as an end to the Brexit saga appeared to be in sight. The currency earlier swung between losses and gains as the Democratic Unionist Party denied reports it may support some of the latest proposals, an issue that has risked collapsing this week’s talks.

“Price action will remain volatile and liquidity will be challenging,” said Brad Bechtel, head of foreign-exchange at Jefferies LLC. “It’s hard to trade something that can move 2% on a headline, so there is not as much participation as there would normally be.”

The pound traded at $1.2826 as of about 3:50 p.m. in New York, after touching a five-month high of $1.2877. It’s still up about 0.3% on the day.

Time is running out to secure a Brexit deal before this week’s summit of European leaders, as U.K. Prime Minister Boris Johnson struggles to win the support of the DUP.

U.K. markets have been in the grip of Brexit since the 2016 vote with the pound the main barometer of market sentiment -- it plunged to its weakest since 1985 in a flash crash in October that year. The currency lost 14% since the referendum through Oct. 16, while the FTSE 100 share index rallied 13% as a weak sterling boosted British firms’ earnings abroad. The uncertainty buoyed demand for the safety of sovereign debt, fueling a gilt rally that almost halved benchmark yields in the past three years.

The past few days have been tumultuous for sterling, and option prices have showed traders bracing for the biggest swings since the 2016 Brexit referendum. One-week implied volatility in the pound-dollar pair at one point on Wednesday surged to 20.07%, the highest level since July 2016.

--With assistance from Vassilis Karamanis and Michael Hunter.

To contact the reporters on this story: Charlotte Ryan in London at cryan147@bloomberg.net;Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, ;Benjamin Purvis at bpurvis@bloomberg.net, Neil Chatterjee, William Shaw

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