(Bloomberg) -- The pound’s best run against the euro since 2016 will be tested next week as leaders from Britain and the European Union seek to make progress in breaking the Brexit deadlock.
Sterling has climbed for five weeks against the common currency, rallying on the slightest hints of Brexit compromise. With British Prime Minister Boris Johnson now scheduled to meet European Commission President Jean-Claude Juncker Monday to discuss the “rough shape” of a divorce deal, pound traders will be watching for some evidence of a potential solution.
The British currency has also recovered against a weaker dollar to above $1.24, after plunging to a two-year low under $1.20 earlier this month on fears of a no-deal Brexit. The latest leg higher came after reports that the Northern Irish Democratic Unionist Party would accept a new customs agreement to replace contentious Irish border proposals that have been the sticking point in talks, even though party leaders later disputed that.
The pound has proven resilient following a week where the U.K. Parliament was suspended and the government’s “Operation Yellowhammer” report warned of the potential disruption from a no-deal Brexit. Optimism a deal could be reached has led some traders to exit positions betting against the currency, though there is a risk of a pullback for Canadian Imperial Bank of Commerce.
“We are seeing a short-covering rally, but I suspect that we are not yet that close to an agreement so we are set to see gains unwind if we see renewed political uncertainty once the Parliament returns on Oct. 14 or sooner,” said Jeremy Stretch, the head of G-10 currency strategy at CIBC. “We can expect everything to be dominated by politics, plus of course we have the overarching issue of the Supreme Court to monitor.”
Eleven judges from the U.K.’s top court will meet on Sept. 17 to review conflicting rulings from national courts on whether Johnson’s move to suspend Parliament for a month was an unlawful abuse of power, in what could be the most closely watched legal proceedings in the country’s history.
Next week will also see the release of economic data including retail sales and consumer prices, where any weakness could weigh on sterling, as well as the Bank of England’s policy meeting on Sept. 19. The central bank’s worst-case Brexit scenarios are less severe than assumed last year due to greater preparation, Governor Mark Carney said earlier this month.
“As it’s not an Quarterly Inflation Report month and the BOE are not likely to want to get further caught in the Brexit crossfire the bank is unlikely to materially turn the dial,” Stretch said.
Pound volatility is at emerging-market levels and U.K. assets are set for a substantial repricing once the Brexit outcome becomes known, Carney has said.
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