Sterling rose to a two-month high after European Union diplomats said that Britain has moved “close” to EU demands over Brexit, although concerns that differences remain on key conditions capped the currency’s gains on Wednesday.
A British government official cast doubt on a Daily Telegraph report saying the net bill for leaving the bloc would total 45 to 55 billion pounds ($53 to $65 billion), amid growing expectations that a deal will be struck soon.
Investors greeted the figure for the “divorce bill” with relief, lifting the pound more than 1.5 percent from Tuesday’s lows to above $1.34 for the first time since early October.
“Clearly the news overnight is good news,” Mark Burgess, deputy global CIO at Columbia Threadneedle Investments, said.
“If we do pay some 40 or 50 billion euros over the next 30 or 40 years and we get a good trade deal then the outlook for the UK economy is better than it was, though I still believe Brexit will have a negative impact,” he added.
Sterling jumped 0.5 percent to $1.3431 on Wednesday, extending a late Tuesday rally in New York trading.
“There is a lot of water that has to flow under this particular bridge before we see investors becoming optimistic about the pound in their portfolios,” Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets, said.
For a factbox on the key points that EU officials and diplomats say British Prime Minister Theresa May must be ready to concede when she visits Brussels on Dec. 4:
Reflecting the newfound optimism that a deal would be struck, the euro weakened to a three-week low against sterling to 88.55 pence in early trades.
Despite sterling’s jump since Tuesday, sterling remained well below a 2017 high of $1.3659 hit in late September and more than 11 percent below the June 2016 Brexit vote of $1.5022.
Stephen Gallo, European head of FX strategy at BMO Financial Group in London said sterling may be heading up to $1.40 over the next six to 12 months, although further progress needed to be seen on trade and transition agreements.
Market positions on sterling remained broadly light, with the latest CFTC data showing investors remained broadly neutral on the British currency while other longer-term surveys on central banks showed underweight, reflecting Brexit concerns.
A trade-weighted index of the British currency jumped 1.4 percent to 78.3 in early trading on Wednesday.
On turnover charts, volumes traded on sterling against the dollar and euro subsided on Wednesday after spiking 8 to 10 times above its 1 month trading average overnight.