Sterling approached its highest levels in two-and-a-half years while UK stocks advanced on growing optimism Brexit negotiators will forge a Christmas Eve trade deal between the UK and EU.
The pound climbed 0.7 per cent to $1.3588 in the afternoon, leaving it close to the 2020 peak of $1.3624 struck earlier this month. Britain’s currency also advanced against the euro, gaining 0.6 per cent to €1.1142.
Progress in the trade talks came after European Commission president Ursula von der Leyen and UK prime minister Boris Johnson took personal control of negotiations in a race to break deadlocks on issues such as fishing rights.
“What was billed as an oven-ready deal has taken nearly a year to defrost, but the fact it now seems so much more palatable for both sides is providing some much needed Christmas cheer for investors,” said Susannah Streeter, senior investment analyst at Hargreaves Lansdown.
“Even though a deal will need to be voted on by MPs in Westminster and MEPs in Brussels a wave of relief has already washed over the London market.”
In equities, London’s benchmark FTSE 100 closed up 0.1 per cent, with Lloyds Banking Group leading the pack with a gain of 4 per cent. The FTSE 250, which is more sensitive to the outlook for the economy because of its heavier weighting towards domestic-focused groups, rose 1.2 per cent. The mid-cap index has gained more than 18 per cent during the final three months of the year, leaving it on track for its best quarter since 2009.
European stock markets also inched higher on Thursday, with the regional Stoxx 600 benchmark gaining 0.2 per cent.
Investors now felt “an element of relief that one of the main uncertainties for 2021 is clearing”, said Cristina Matti, head of European small and mid-cap equities and country strategies at Amundi. “Investors feel more confident we can get back to our normal job of forecasting companies’ prospects in a more stable environment.”
The brighter Brexit outlook also rippled into the UK government debt market, where yields have been suppressed by the prospect of the Bank of England lowering interest rates, possibly into negative territory, to ease no-deal disruption to the nation’s economy and financial markets.
The 10-year gilt yield, which moves inversely to the price of the securities, rose by a tenth of a percentage point on Wednesday afternoon to 0.29 per cent, in its biggest increase since March, and was little changed on Thursday morning.
“The devil will be in the detail, but at least we are on the cusp of a deal finally being agreed, and we can hopefully look forward to a strong economic recovery from the second quarter of next year onwards, after the vaccines have been rolled out,” said David Owen, chief European economist at Jefferies.
The UK’s departure from the EU has been the defining theme for the currency since the referendum of June 2016.
In the immediate run-up to the announcement that UK voters had opted to leave the bloc, the pound was trading at about $1.50 against the dollar.
The pound staged one of its most violent falls on record in the aftermath of the referendum result, tumbling to just over $1.32. A scorching rally in the dollar during the market tumult of March 2020 sent the currency spiralling to about $1.14, but generally sterling has oscillated around $1.30 since the Brexit vote, jolted higher and lower by the vagaries of the trade talks.
Despite the often fraught nature of the negotiations, investors and analysts have largely been confident that some form of deal would be struck. Without one, some predicted that sterling could fall as low as $1.20 or even $1.10.
Still, Mr Owen cautioned that even if there is a deal, “this is not the end of Brexit, far from it”.
“2021 will be the start of managed divergence and for many companies, particularly for services, a fundamental change in the way they do their business,” he said.