Sterling rallied on Monday, lifted by a pushback against the prospect of negative interest rates from a senior Bank of England official and a more positive tone to the Brexit trade negotiations.

After sweeping lower through most of this month, the pound jumped by 1.4 per cent against the dollar to a high of $1.2925 in late-morning trading, before giving up some of those gains to trade just below $1.29. At its peak, the currency also muscled 1 per cent higher against the euro.

The jump followed comments from Dave Ramsden, the BoE’s deputy governor, who said that the central bank was “not about to use negative interest rates imminently”. Mr Ramsden’s pushback against rate cuts — in an interview with the Society of Professional Economists — follows BoE governor Andrew Bailey’s attempts to temper investors’ expectations about the timing and likelihood of negative rates.

“Ramsden just poured a bit more cold water on the idea of negative rates,” said John Wraith, head of UK rates strategy at UBS.

Following its most recent policy meeting earlier this month, when the BoE said it was exploring the practicalities of cutting rates below zero, derivatives markets were fully pricing in a move to minus 0.1 per cent by the end of 2021. That implied probability has now receded to roughly 50 per cent.

A more positive tone to trade talks between the UK and the EU ahead of this week’s round of negotiations has also bolstered the currency. The two sides are set to meet in Brussels tomorrow for three days of crunch-time talks, the result of which could see senior officials entering more intensive negotiations to hammer out a deal ahead of the October 15 EU summit.

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“The mood music around Brexit negotiations has turned slightly positive,” said Sanjay Raja, a UK economist at Deutsche Bank.

Line chart showing $ per £ since September 23

Win Thin, global head of currency strategy at Brown Brother Harriman, said investors became more optimistic about the outcome of the talks after reports last week that the EU chief negotiator was determined to reach a deal, which led to a drop-off in demand for options that protect investors from further weakness in the pound.

“The final week of Brexit negotiations is upon us in Brussels and the pendulum is swinging towards optimism,” Mr Thin said.

But other investors remain cautious. JPMorgan analysts said the bank was sticking to its negative view on sterling against the dollar, which it initiated last week as a result of concerns about Brexit and economic growth.

Jordan Rochester, a currency strategist at Nomura, warned that traders could be in for a tough week as headlines from the talks could cause gyrations in the exchange rate. “In the short term, the market looks to be pricing in a potential Brexit deal . . . but there is a lot to think about beyond that,” he said.

Analysts at Indosuez Wealth Management also noted that the pick-up in volatility as the deadline approached could lead some investors to stay away from trading the currency as “it’s too messy to get involved”.

Via Financial Times