The pound soared to its highest level since July on Friday after a newspaper report boosted growing hopes a no-deal Brexit will be avoided.
The Times wrote that the Democratic Unionist Party (DUP) had privately said it would drop its objection to regulatory checks in the Irish Sea, if Brussels agreed to abandon demands for Northern Ireland to remain in a customs union with the EU. That would speed up progress on a Brexit deal acceptable both to the UK and the EU, as the so-called Irish backstop has been a major stumbling block.
DUP leader Arlene Foster rejected the speculation, saying late on Thursday: "UK must leave as one nation. We are keen to see a sensible deal but not one that divides the internal market of the UK.”
Still, the pound gained more than 1 per cent against the dollar on Friday morning to trade as high as $1.2475, a seven-week high. By Friday afternoon, it was 0.9 per cent higher on the day.
“It’s clearly about a reduction in no-deal risk being perceived,” said Neil Wilson, chief market analyst at Markets.com. He noted that shorting, or betting against, sterling has become a very “crowded” – and hence less attractive – trade, prompting traders to bet the other way which also lifted the currency.
“I think there is now a sense that, given the complete breakdown in the normal processes, revoke [of Brexit] is back on the table too, so that risk has to be priced back in,” he added.
Last week MPs passed a law preventing a no-deal Brexit on 31 October and refused to grant Boris Johnson an early general election, which he hoped would give him a majority in parliament.
But the chances of leaving with an exit agreement are also uncertain as the only deal agreed with the EU after two years of talks has been rejected by Britain’s parliament three times.
Since the vote to leave the EU, the pound has lost 17 per cent against the dollar and almost 15 per cent against the euro.
Additional reporting by Reuters