Major investment banks said on Friday they had become more optimistic on the prospects for a Brexit deal, following an upbeat meeting between the British and Irish leaders that buoyed the pound.
Irish Prime Minister Leo Varadkar on Thursday said that a withdrawal agreement could be clinched by the end of October, which would allow the United Kingdom to leave the European Union in an orderly fashion.
EU negotiator Michel Barnier and his British counterpart Stephen Barclay, meanwhile, held a “constructive” meeting on Friday, both the British and EU sides said.
The pound, British stocks, bonds, and Irish government bonds rallied, as investors scrambled to cover short positions, with the British currency hitting its highest levels in over three months.
Deutsche Bank said it was no longer negative on the pound.
“This represents a significant change of tune by the Irish government, that has so far been relatively pessimistic about the prospect of talks moving forward,” Deutsche Bank foreign exchange strategist Oliver Harvey told clients.
JPMorgan meanwhile predicted a deal would be struck, noting the two sides appeared to have found a solution to the thorny Irish border issue. The bank now sees a 50-per-cent chance of a withdrawal agreement being struck with a “modified/time-limited” Irish backstop.
It had previously put the likelihood at just 5 per cent.
Some remain doubtful. Time is short and any deal British Prime Minister Boris Johnson brings back from Brussels will need the approval of the U.K. Parliament, especially from hardline pro-Brexit factions.
The British government is therefore likely to request an extension to the Brexit deadline and then hold a general election, UBS Wealth Management said. But it acknowledged that the chances of a Brexit agreement had nonetheless increased.
“The chances of a deal seem to have improved and the pound has moved accordingly but hurdles still remain,” said Dean Turner, economist at the wealth manager.
“Time to thrash out the details of the deal are tight, and then there is the question of parliamentary approval.”
A deal would prolong the rally in the pound, Mr. Turner said, predicting the pound sterling would hit US$1.35 and trade in the “low 80s” against the euro if there was an agreement.
Goldman Sachs was ahead of the bunch however, sending a recommendation late last Friday for clients to buy sterling against the dollar, with a target of US$1.30 compared with the then spot pound value of about US$1.23.
They assessed the probabilities of a Brexit deal being struck at 60 per cent.
Political risk consultancy Eurasia Group raised its probability of a Brexit deal from to 10 per cent from 5 per cent. But barriers to one were still substantial, the analysts cautioned.