LONDON: The British pound rose more than 1% on Monday on hopes that Britain could secure a Brexit trade deal with the European Union by October or at least avoid a cliff-edge exit from the bloc.
The EU and Britain kicked off a decisive week of talks on Monday but cautioned that a deal was still some way off.
A final agreement must be reached by the end of December but both sides have set a preliminary deadline for next month as it will take some time to sign off any deal.
The pound's gains were fuelled by an EU diplomat saying last week that "the mood music was a bit better" after Britain's Brexit supremo Michael Gove expressed confidence about securing a trade deal.
"If discussions this week lead to a break through in fisheries and a level playing field then we could hopefully land an agreement by Oct. 15," Kenneth Broux, head of corporate FX at Societe Generale, said.
The Bank of England Deputy Governor Dave Ramsden's comments on Monday saying he thought the floor for the central bank's key interest rate was 0.1% could also have helped the pound, but his views were already known in the media, Broux said.
"We have a good starting week for risk assets, we've got some cautious optimism on Brexit and we've got month-end and quarter-end so we have to be very mindful of all these factors coming together," he added.
Sterling was trading 1% higher at $1.2863 by 1500 GMT, having earlier risen to a one-week high of $1.2930. It was also 0.7% higher versus the euro at 90.61 pence, after hitting a 20-day peak of 90.26.
Latest CFTC data showed that hedge funds held a small amount of sterling short positions in the week to Sept. 22.
"There's hope that, no matter what, they will avoid the extremes and even if there is no deal, they will make sure that we don't get any disruptions in the market," said Athanasios Vamvakidis, global head of G10 FX strategy at BAML.
The UK's Internal Market Bill had raised worries that Britain was on course to override the Withdrawal Agreement signed last year which protected the border between Ireland and Northern Ireland, an issue at the heart of last year's Brexit negotiations.
"It seems that the UK government ... have indicated that they will avoid violating the Withdrawal Agreement so this was one positive," Vamvakidis said.
Gove said Monday the clauses of the Internal Market Bill that undercut the Withdrawal Treaty would remain but the EU indicated it would not leave the negotiating table.
As the British government mulls tougher restrictions to tackle the swiftly accelerating second wave of the coronavirus outbreak, the recession induced by the pandemic has market watchers questioning whether Britain will cut its interest rate below zero. However, for now money markets do not price in a probability of a rate cut at the next November meeting.
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