Battered pound clings to hopes of a Brussels Brexit breakthrough

LONDON: Sterling on Tuesday clung to hopes that a Brexit trade deal is still possible with British Prime Minister Boris Johnson set to meet European Commission President Ursula von der Leyen in Brussels.

With only days left to the end of the Brexit transition period, leaders have again failed to resolve their outstanding differences on a future trading relationship, sending the British currency hurtling to a near three-week low on Monday.

While sterling recouped most of the previous session's sharp drop after the announcement of the meeting in Brussels, it was on track for a third consecutive day of losses.

Versus the dollar, the pound was down 0.3% at $1.3343 at 1127 GMT, after touching an almost three-week low of $1.3225 on Monday.

Against the euro, sterling was 0.4% lower at 90.85 pence, after falling to a seven-week low on Monday.

One-week implied volatility for the pound hit a eight-month high, while the premium of pound puts to calls is also elevated, as traders hedge against a no-deal outcome, although it has tempered slightly since Monday.

Kit Juckes, head of FX strategy at Societe Generale, said the way the market is trading suggests there's a "reluctance to envisage" how big the sterling move could be because the two outcomes are both still possible.

"The market is buying itself protection against a big upside move but the spot market still doesn't really know how to position itself," he said. "That makes sense but there's no doubt to me that the current level of sterling is not where it would be if we leave without a deal".

Traders have grown hopeful that face-to-face meetings between UK and EU leaders can break the deadlock.

"It has been taken as a sign that the UK Government would indeed like to strike a deal, and that the significant differences can still be solved through political intervention from both sides," said Shreyas Gopal, FX strategist at Deutsche Bank of the upcoming meeting.

The pound's losses this week are a complete U-turn in sentiment after it briefly scaled a 2020 high above $1.35 last week on growing optimism a deal was within sight.

Johnson said on Tuesday that Brexit talks were "very tricky" and there might come a moment when London would have to acknowledge that it was time to go for a no-deal Brexit and abandon talks.

UBS strategists said in a note that progress could still be made over the next few days and a compromise deal would likely offer sterling a short-term lift.

Juckes added that a new high in euro sterling was likely if the UK leaves the bloc for good without a deal.