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Pound expected to rise in coming days if Brexit talks reach crucial milestone

  • The pound hit a two-month high on Wednesday after media reports said that the U.K. government had increased its financial offer to the European Union
  • The European Union is set to update on the ongoing Brexit negotiations in the coming days
  • There are still issues to overcome in the negotiations, including the future of the Irish border

Sterling is expected to strengthen in the coming days ahead of a crucial European Summit where an important milestone for Brexit negotiations is set to be reached.

"You'd get a big move into the pound, if there's agreement to move to trade (negotiations)," Stephen Isaacs, chairman of the investment committee at Alvine Capital, told CNBC on Wednesday.

The pound hit a two-month high on Wednesday after media reports said that the U.K. government had increased its financial offer to the European Union – the so-called Brexit bill, which is what the U.K. could pay to fulfil its remaining obligations to the bloc before it leaves.

This increased the chances of a deal on the three main issues that have derailed the talks over the past months. Sterling was up 0.5 percent against the dollar, trading at $1.3405 at about 11:30 a.m. London time.

The EU and the British government haven't yet confirmed these reports of a financial contribution somewhere between 50 billion and 100 billion euros. However, the European Union is set to update on the ongoing Brexit negotiations in the coming days.

Jason Alden | Bloomberg via Getty Images

European leaders are gathering in Brussels on December 14. Both sides of the table have expressed their willingness to reach an agreement on the exit bill, citizens' rights and the Irish border issue before that meeting to ensure they can approve the start of talks on a future trade deal that day.

Stephen Gallo, European head of forex strategy at BMO Financial Group, told CNBC that approving the start of trade talks would not hurt sterling, but the big rally will only come when there are concrete evidences of how trade will work after the U.K. leaves the EU.

"It wouldn't be a GBP-negative development, that is for sure," Gallo said. "The market consensus will now be that the discussions shift over to trade and transition at the December EU summit, so I am doubtful that a realization of the shift will be responsible for a big move up in the GBP when it actually happens next month."

"The big rally in GBPUSD that takes us back to the $1.45-1.50 range won't happen until it starts to look like a trade/transitional deal is coming to real fruition," he added, saying he only expects to see that in the second half of next year.

However, despite the recent headlines indicating some progress when it comes to the exit bill, there are still issues to overcome in the negotiations, including the future of the Irish border. This means that leaders might not end up approving trade talks on December 14 — which could, on the other hand, hurt sterling, given currency traders seem to be preparing for the opposite scenario.

Moritz Kraemer, chief sovereign rating officer at S&P Global Ratings, told CNBC Wednesday: "I think what's happening is they are trying to create some momentum, creating a sense of progress after months of stagnation."

"This is only one of the three main elements they need to agree on. Let's remind ourselves it's the Irish border, it's exit bill, it's the status and the right of EU citizens in the U.K. and vice versa," Kraemer said.

Brexit negotiations started last June. These three key issues were originally scheduled to end in October, but the divergent opinions haven't allowed that.

"In all three of them there are still big hurdles in terms of differences of opinion, which seems hard to bridge," Kraemer added.