LONDON: Sterling edged higher against a struggling dollar on Friday and is poised for its biggest weekly rise in a month as investors became cautiously optimistic that Britain would strike a deal at a summit next week over a transition period for its EU exit.
While sticking points remain such as a deadlock over the Irish border issue and recent headlines from senior officials have highlighted that differences remain, businesses have raised hopes the bloc's leaders can endorse a transition at a Brussels summit on Friday.
"A transition deal is not a game changer for the currency markets but what will be a major driver is if we get an open-ended transition deal which will take away the nervousness of a hard Brexit," said Morten Helt, a currency strategist at Danske Bank in London.
On Friday sterling was up by a quarter of a percent at $1.3977. For the week, it has gained one percent, its biggest rise in a month.
Against the euro, which is a better barometer for Brexit negotiations, sterling consolidated gains at a 2-1/2 week high of 88.16 pence.
Sterling hit $1.4346 on Jan. 25, its highest level against the US dollar since Britain voted to leave the European Union in June 2016.
Though it has pulled back modestly from those highs, it remains near the top of its trading range of $1.20 to $1.43, buoyed by hopes a Brexit transition deal will be eventually be struck and by a generally weaker US currency.
In other major developments next week, the Bank of England is set to announce a policy decision which may shed some light on the future path of interest rates. Markets are now pricing in about 36 basis points of rate hikes over the year.
Britain's reliance on the "kindness of strangers" to finance its large current account deficit appears to be increasing, the Bank of England said on Friday.
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