(Bloomberg) -- The pound rose after the U.K. and the European Union said they will continue talking about a trade agreement, keeping hopes for a late deal alive.

Sterling was quoted as much as 1.2% higher at $1.3378 as of 5:26 a.m. in Sydney, after U.K. Prime Minister Boris Johnson and European Commission President Ursula von der Leyen agreed to keep working on a post-Brexit accord. The duo had earlier said that negotiators had until Sunday to come up with a deal.

With less than three weeks until Dec. 31, the date when the transition period for the U.K.’s departure from the EU officially ends, many investors had hoped for a breakthrough by Sunday -- or alternatively clarity that Britain would indeed exit the bloc without a deal. Instead, they must prepare to parse yet more Brexit headlines amid choppy trading, with liquidity likely to get worse as the holiday season nears.

If a trade agreement isn’t struck by the end of the year, decades of free movement of goods, services, people and capital will come to an abrupt end. British firms would revert to trading with the EU under rules established by the World Trade Organization in 1995. That means imports and exports to the EU would be subject to WTO-negotiated tariffs -- essentially a tax on goods.

Such a scenario could push the Bank of England to cut interest rates below zero for the first time ever, BofA Global Research said earlier this year. Bloomberg Economics estimates Britain’s economy would suffer a near-term shock of around 1.5% of output.

Many bank strategists predicted that talks would indeed continue; market participants have become hardened to countless missed deadlines and last-minute talks around Brexit in recent years.

Still, that hasn’t stopped traders taking precautions to limit their exposure in recent days. The cost to hedge swings in the pound on Friday was the highest since the pandemic-induced market turmoil of March -- a spike only exceeded in the past five years following the 2016 Brexit referendum itself.

©2020 Bloomberg L.P.