LONDON: Sterling touched a three-week high on Tuesday after the outline of a proposed EU deal said Britain does not have to integrate further politically with the rest of the European Union if it wants to stay in.
The proposals addressed all four areas where Prime Minister David Cameron has demanded reform, but they were met with a mixed reception that underlined the challenge of convincing Britons they should stay in the bloc. The reforms must still be agreed by other EU leaders at a summit later this month.
The pound rose to as high as $1.4447 after the draft proposals were published, up from $1.4380 immediately beforehand, and its strongest since Feb. 13. Later, it eased back a touch, to $1.44, leaving it down 0.2 percent on the day.
Sterling had earlier fallen to as low as $1.4328 after a survey on Britain's construction sector showed growth slipped to a 9-month trough in January, denting expectations of a pick-up in gross domestic output.
Against a broadly stronger euro, sterling fell 0.4 percent to 75.725 pence, having strengthened to as low as 75.615 pence after the draft was published.
ING FX strategist Viraj Patel wrote to clients that he recommended selling the euro against sterling. He said short-term "Brexit" newsflow around may actually be positive for the pound, and that the Bank of England was likely to be neutral on the issue when it releases its Inflation Report on Thursday.
Furthermore, Patel said, sterling should benefit over the coming weeks from less jittery global markets, and the euro was likely to be weak in the lead up to the European Central Bank's March meeting, where more easing is expected to be announced.
Cameron has been locked in talks with European Council President Donald Tusk, who announced the proposals on Tuesday, to win what he calls the "best deal possible" for Britain while keeping other EU states onboard before a referendum, which could take place as early as in June.
Though the draft proposal had been expected today, its content had not been clear in advance. ETX Capital currency dealer Richard Wiltshire in London said the fact that there had been perceived progress on all four areas of Cameron's demands had boosted sterling.
"In an otherwise thin and lacklustre day ... that news of real progress has given sterling a little fillip," he said.
The cost of hedging against big changes in sterling's exchange rate against the dollar over the next six months had earlier hit a 9-month high of 9.85 percent, but fell a touch after the proposals were published.
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