Sterling awaits Brexit deal confirmation, approaches 2-1/2-year high

By Sujata Rao

LONDON (Reuters) - Sterling rose to $1.36 on Thursday and was set to scale the 2-1/2 year highs hit last week as markets awaited confirmation that Britain and the European Union had finally clinched a deal to govern trade when the Brexit transition ends on Dec. 31.

The currency has strengthened some 1.5% versus the dollar since Reuters reported at around 1330 GMT on Wednesday, quoting sources, that a Brexit deal appeared imminent.

It is now around $1.3580, up 0.7% on the day, having briefly risen past $1.36 and heading towards the 2-1/2 year high of $1.3625 hit last week.

Against the euro, it was up 0.5% by 0900 GMT at 89.7 pence.

There is yet no official confirmation but sources say a deal is close as British Prime Minister Boris Johnson held a late-night conference call with his senior ministers, and negotiators pored over reams of legal texts.

Berenberg analyst Kallum Pickering said a deal would remove a major downside risk to the UK economy.

It would "unlock significant investment in UK and support the recovery once the ongoing coronavirus shock starts to fade as well as provide a positive backdrop for UK equities and sterling heading into 2021," Pickering wrote in a note to clients.

Watch: Why can't governments just print more money?

While the pound and UK stocks have rallied strongly in recent weeks as optimism grew over a last-minute deal, the consensus is most UK assets remain undervalued and will gain further once a deal is confirmed.

Pound options also calmed, with one-week implied volatility, a gauge of expected swings -- at the lowest since Dec. 1 at 9.6%. It is down more than 7 percentage points since the first report of an imminent Brexit deal emerged on Wednesday.

For graphic of Sterling and sterling options: https://fingfx.thomsonreuters.com/gfx/mkt/gjnpwkkkypw/gbp.PNG

FTSE mid-cap stocks, which are more oriented towards the domestic UK economy, rose 0.6% hitting the highest since February.

Asset manager Candriam told clients it was overweight UK domestic equities and sterling.

"UK equities are the ultimate value play. They should fully benefit from a relief if we find a Brexit agreement and from the recovery once we come out of the health crisis."

The Brexit deal hopes have pushed UK 10-year government borrowing costs more than 10 basis points higher on Wednesday.

Yields have since slipped 1.5 bps, given the lack of fresh headlines and the pressure on the UK economy from Brexit and coronavirus-linked lockdowns.

Watch: Will Interest rates stay low forever?

(Reporting by Sujata Rao and Iain Withers; Editing by Rachel Armstrong and Karin Strohecker)