The pound is climbing at the fastest rate since 1985 and global stocks are rallying as the U.K. and European Union announced a Brexit deal.
Sterling touched a five-month high and haven assets such as U.K. government bonds and the yen fell after European Commission President Jean-Claude Juncker said the two sides had reached an agreement. Optimism has been building among investors in recent days on a significant change in tone in the talks, though Northern Ireland’s Democratic Unionist Party has maintained its opposition to the plan.
The agreement between the two sides paves the way for an end to the political drama that has roiled U.K. markets for the past three years. The pact still has to get through Parliament, after Prime Minister Boris Johnson’s predecessor Theresa May saw her own deal rejected three times, eventually toppling her leadership.
“Big win for Boris -- if he manages to get it through Parliament, we should see a wave of ‘risk-on’ trades coming into the U.K. market,” said Artur Baluszynski, head of research at Henderson Rowe. “However, let us wait and see all the details and then let the markets decide how likely it is for the U.K. Parliament to accept it. For now, expect some positive momentum in sterling and domestically-focused asset classes.”
U.K. markets have been in the grip of Brexit since 2016 with the pound being the main sentiment barometer -- it plunged to its weakest since 1985 in a flash crash in October that year. Sterling is still down 13 per cent since the referendum, while the FTSE 100 share index has rallied 13 per cent as a weak currency boosts British firms’ overseas earnings.
The pound traded 0.6 per cent higher at US$1.2906, after touching the highest since May 13. That takes gains over six trading days to nearly six per cent, heading for the biggest rally since 1985. Yields on U.K. 10-year government bonds gained four basis points to 0.75 per cent. Uncertainty over the split with the EU had buoyed demand for the safety of sovereign debt, fueling a gilt rally that almost halved benchmark yields in the past three years.
The FTSE 100 stock index gained 0.7 per cent, led by banks and builders, while the more domestically-focused 250 Index rose 0.8 per cent to a one-year high. U.S. equity futures pointed to a stronger open.
European leaders were aiming to get an agreement that could be signed at a summit starting Thursday. The U.K. currency still faces the hurdle of the deal passing through the U.K.’s Parliament in an emergency session slated for Saturday.
That’s not a given as Johnson does not have a majority and lawmakers remain divided on Brexit. There is still the prospect of a veto from the DUP, which he may need in order to get the deal approved.
Investors have rushed to cover short positions betting against sterling in the past week as the tone on Brexit changed. Several banks have turned positive on the currency, with Deutsche Bank AG citing the “pivotal moment” last week when the two sides said they could see a path toward a deal.
The weekend sitting by the U.K. Parliament, the first Saturday debate since the Falklands conflict in 1982, will be the next big focus for investors. If a deal does pass, the pound could rally to US$1.40, the highest since early 2018, according to Mizuho Bank Ltd.
“Betting on further volatility still looks like a decent prospect, and better than taking a position in the spot price,” said Stephen Gallo, head of European currencies strategy at the Bank of Montreal.
--With assistance from Michael Hunter, Anooja Debnath and Liz Capo McCormick.