By Sujata Rao
LONDON (Reuters) - Sterling rose around 1% on Wednesday and British government bond yields posted their biggest one-day rise in more than a month on signs that Britain and the European Union were on the brink of clinching a deal to govern trade ties.
A deal is imminent and could be agreed as early as Wednesday evening, a senior EU diplomat told Reuters.
Earlier, EU member states began to prepare procedures to put in place a new trade deal with Britain from Jan. 1, sources in the bloc said, indicating a deal was imminent.
There was no confirmation from Britain, however, and sterling eased off session highs after reports that some government officials remained cautious.
"The market is anticipating that a deal will be agreed in the next day or two," said MUG strategist Lee Hardman, adding sterling could strengthen to $1.36/$1.37
He said, however, traders would be keen to see details of any agreement, given expectations that any initial deal will be a bare bones one with specifics to be thrashed out in 2021.
"The best case scenario for the pound would be if we also see details released form the EU and UK side of things alongside the deal to try and reduce the initial disruption when we shift to a new trading arrangement."
The pound which had earlier snapped a three-day losing streak on the lifting of a French border blockage, extended gains to $1.3569, up more than 1.3% on the day. It traded around $1.3505 by 1630 GMT.
Against the euro, the pound was 0.8% at 90.28 pence, having earlier risen to 90.05 pence.
Gilt yields rose, with 10-year yields up 12 basis points to 0.30%.
The UK yield curve was set for its biggest one-day rise since early-November as a Brexit deal would likely make it unnecessary for the Bank of England to cut rates into negative territory.
Britain's mid-cap shares gained 1.7%.
Momentum has built in recent days for an agreement, given that failure to do so by Dec. 31 will disrupt commerce worth $1 trillion annually, while casting Britain adrift without any arrangements in place with its biggest trading partner.
That would coincide with a darkening economic outlook as a virulent new COVID-19 strain forces more activity curbs across Britain.
Earlier, the Confederation of British Industry requested more government support, noting the deepening fall in business activity. UK car production slipped further last month, data showed, meaning output is down by almost a third so far.
"The trade deal...is positive for the markets and sterling for sure, as some of the risk premium can be erased if the deal will be sealed," said Lauri Halikka, a strategist at SEB in Stockholm.
"However, a lot of underlying fundamental problems still remain of course in the UK, not least the difficult Covid-19 situation."
(Reporting by Sujata Rao, Danilo Masoni, Joice Alves, Yoruk Bahceli; Editing by Karin Strohecker)