Sterling builds on 2-1/2 year high on Brexit deal hopes, BoE keeps policy unchanged

LONDON (Reuters) -Sterling rose to $1.36 on Thursday, building on a 2-1/2 year high against a struggling dollar as reports of progress in Brexit trade talks boosted appetite for the British currency, while the Bank of England kept its stimulus programme unchanged.

FILE PHOTO: UK pound coins plunge into water coloured with the European Union flag colours in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic

With just two weeks left to the end of the Brexit transition period on Dec. 31, sterling has gained about 2% against the dollar this month, helped by hopes of a UK-EU trade deal.

The pound extended gains on Thursday to $1.3601, up 0.7% against the dollar at 1610 GMT, after it jumped to its highest level since May 2018 on Wednesday.

Against the euro, it gained 0.3% to 90.00 pence, after it hit a one-week high of 89.83 in earlier trading.

Sterling also touched a day-high of $1.3623 against the dollar when the BoE said it was keeping its stimulus programme unchanged as it awaited the outcome of Britain’s negotiations with the EU.

Almost a year after Britain formally left the EU, the two sides are in the final stretch of talks over a post-Brexit trade deal.

“Sterling trading is likely to remain firm”, said Neil Jones, head of FX sales at Mizuho Bank. “The market is looking for a deal with compromise on fisheries” – one of the sticking points in the negotiations.

The 27 national envoys to European Union hub Brussels will get an update on the latest in the trade talks with Britain at 0830 GMT on Friday, EU diplomatic sources said.

EU Brexit negotiator Michel Barnier said on Thursday that “good progress” was being made in talks with Britain, although senior British minister Michael Gove put the chances of securing a trade deal at less than 50%.

But analysts are taking as a positive sign for the pound that Britain’s parliament will be on standby during its Christmas break, and could be recalled at short notice to pass required legislation if a trade deal is struck.

“We obviously expect some further short-term euphoria, driving the pound higher immediately after a deal would be announced,” said David Meier, senior economist at Bank Julius Baer, adding that, however, arrangements to extend the Brexit transition period deadline cannot be fully ruled-out.

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