LONDON (Reuters) - Sterling surged on Tuesday to its highest level against the dollar and the euro since May while British stocks and government bond yields also rose after Bloomberg said British and EU negotiators were closing in on a draft Brexit deal.
Already higher on the day, the pound jumped above its 200-day moving average, a closely watched technical level, after the report as investors watched for any signs of a breakthrough in the Brexit talks.
The British currency climbed 1.5% on the day to $1.28 GBP=D3, a five-month high and also the first time it has gone above the 200-day moving average of $1.2713 since May.
It also rose by the same margin against the euro and was last trading 1.4% higher at 86.29 pence EURGBP=D3.
Sterling has risen nearly 5% higher over the past week as investors rushed to reprice the prospect of a last-minute Brexit deal by the end of Oct. 31 deadline.
“The reaction from the markets shows they want to get this deal over and they are ready to push the button at the slightest sign of a deal,” said Morten Lund, a senior FX strategist at Nordea.
But he said he was “a bit more sceptical about the outcome” given how little time remained to negotiate and the difficulties of getting a deal through the British Parliament.
Talks aimed at reaching a Brexit deal with Brussels are continuing but there is still work to do, British Prime Minister Boris Johnson’s spokesman said.
Kenneth Broux, a corporate FX strategist at Societe Generale, said he expected the pound to rally to $1.30 and even $1.35 if a deal gets through parliament, where Johnson lost his majority just weeks into his term.
The FTSE250 of UK mid-cap stocks .FTSC rose and European equity benchmarks extended their gains on the news.
British government bond yields shot higher. The two-year gilt yield GB2YT=RR rose to its highest level since Sept. 16 at 0.575%, up 7.5 basis points on the day.
The move rippled into the broader European bond market with 10-year German government bond yields up 4 basis points to -0.41%, their highest in two and a half months. DE10YT=RR
“The more uncertainty you remove the better for investors. If the prime minister and the EU were now to agree a deal, then the market would take that positively,” said Edmund Shing, global head of equity derivatives strategy at BNP Paribas.
Britain must reach a Brexit deal with the bloc by the end of Tuesday for it to be approved at a leaders’ summit this week, the bloc’s officials and diplomats said. Otherwise, Britain’s scheduled departure date of Oct. 31 could be delayed.
Officials said it was still possible to reach a deal over customs arrangements on the island of Ireland by the Tuesday deadline, and if not, an extra summit could be called before the end of the month.
(GRAPHIC - Pound and bonds: here)
Reporting by the London Markets Team; Editing by Mike Doland and David Clarke