Traders remain on edge as British Prime Minister Boris Johnson races to win support for an agreement to take the United Kingdom out of the European Union before the October 31 deadline. Johnson is meeting with EU leaders later on Thursday, and an extraordinary session of the UK parliament is scheduled for Saturday.
The pound was trading above $1.29 at 5:55 a.m. ET on news that British and EU officials have agreed a new Brexit deal. Earlier, it dropped as much as 0.6% against the dollar after a small political party from Northern Ireland said it would not back Johnson’s proposals in their current form.
Analysts believe the currency could jump as high as $1.35 or even $1.40 if Johnson is able to secure a deal that avoids a chaotic Brexit that ruptures trade and economic ties. One week ago, the pound was trading close to $1.22.
“Volatility is very likely to remain extremely high because sterling is just reacting to the headlines as we have them,” said Jane Foley, senior foreign exchange strategist at Rabobank.
The Brexit process has already wreaked havoc on the pound, one of the most traded currencies in the world.
Before the 2016 vote to leave the European Union, the pound was worth nearly $1.50. The value of the currency dropped sharply following the referendum and spent most of the next three years trading below $1.35.
Economists say Brexit uncertainty has already damaged the country’s economy by hitting business investment and manufacturing. According to the Centre for European Reform, the UK economy is 2.9% smaller that it would have been if Brits had voted to remain in the European Union.
For investors, the big problem right now is the lack of clarity at a high-stakes moment.
The United Kingdom and European Union have been locked in secret negotiations ahead of the EU summit in Brussels on Thursday. Johnson needs a green light from the leaders of the other 27 EU member states to move forward.
The pound has gained six cents against the dollar over the past week amid signs of significant progress. But it will be difficult for the United Kingdom and the European Union to iron out their differences in time. Johnson is attempting a tough balancing act: he needs to make concessions to Europe over the land border with Ireland without alienating lawmakers back home.
That may not be possible.
“All of the relatively constructive outcomes … rest on the idea of Mr. Johnson reaching at least a political agreement with the EU27 in the next [24] hours,” Deutsche Bank strategist Oliver Harvey wrote in a note to clients on Wednesday.
Craig Erlam, senior market analyst at Oanda, a currency broker, thinks the currency could react strongly on Sunday in Asia, the first time markets will have an opportunity to trade the pound after Saturday’s parliamentary session.
But, he cautioned, it’s impossible to say for sure.
There is “incredible unpredictability in what the next eight hours will hold,” Erlam said.
Without an agreement that’s palatable to both Europe and UK lawmakers, Johnson could be forced to ask for another extension to the Brexit deadline. Or, with the approval of the opposition Labour Party, Johnson’s government could trigger a general election.
Mark McCormick, global head of foreign exchange strategy at TD Securities, has warned that the pound’s rise in the past week makes it more exposed to bad news.
Goldman Sachs, meanwhile, has advised clients to bet that the pound will rise against the dollar, predicting that sterling will jump to $1.30 when a deal happens.
The only consensus, really, is that the pound could face considerable pressure — in either direction.