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British Pound Powers Higher on Reports of Brexit Deal on Services, Markets Ignore Barnier's Denial

Theresa May might have reached a deal

Above: Reports say Prime Minister May has struck a deal with the E.U. on the services sector. Image © European Union.

- Deal covering services sector reportedly agreed

- But E.U.'s Barnier denies report

- Pound-to-Euro exchange rate @ 1.336, up 0.50%

- Pound-to-Dollar exchange rate @ 1.2910, up 1.11%

The British Pound powered higher on November 01 amidst reports the U.K. and E.U. have reached agreement on a deal that covers the trade in services following Brexit while a the Bank of England's 'super Thursday' hinted at the need for interest rate rises in 2019.

The news on a services sector agreement is significant as this accounts for over 80% of U.K. economic activity.

"Theresa May has struck a deal with Brussels that would give U.K. financial services companies continued access to European markets after Brexit," says Oliver Wright, Policy Editor at the Times who broke the story.

The report adds government sources have confirmed U.K. and E.U. negotiators have reached tentative agreement on all aspects of a future partnership on services, as well as the exchange of data.

This represents another small, yet crucial, step forward for U.K. business and should a deal be passed we believe it will allow the U.K.'s most important sector to move forward with investments and add to economic growth in 2019.

This is therefore a positive development for the British Pound which has suffered amidst entrenched businesses uncertainty over what the E.U.-U.K. trading relationship will look like following Brexit.

The Pound recorded a low at 1.11848 against the Euro earlier in the week and has now rallied to a high of 1.1385. The Pound has meanwhile recovered from a low of 1.2696 against the Dollar to record this week's high at 1.2969.

However, as is typically the case on unsubstantied reports, the news has been denied.

"Misleading press articles today on Brexit & financial services. Reminder: EU may grant and withdraw equivalence in some financial services autonomously. As with other 3rd countries, EU ready to have close regulatory dialogue with U.K. in full respect for autonomy of both parties," says the E.U.'s chief Brexit negotiator Michel Barnier.

Despite the denial the markets are holding Sterling's gains which tells us that where there are rumours there often lies some truth. Barnier inevitably has to deny any significant rumours; and markets appear to have fully expected the response before it came and subsequently discounted it.

Separately, the European Commission has pledged to allow E.U. companies and individuals to continue using U.K. clearing houses to settle euro-denominated contracts, ending fears that Brexit might create a cliff-edge for trillions of euros of financial derivatives.

According to the Financial Times, this access will be allowed even in the event of a 'no deal' Brexit.

Valdis Dombrovskis, the commission vice-president with responsibility for the Euro, said that counter-parties would be given a temporary waiver to avoid disruption to financial markets.

"Should we need to act, we would only do so to the extent necessary to address financial stability risks arising from an exit without a deal, under strict conditionality and with limited duration," says Dombrovskis.

The positive developments add to improved sentiment mid-week after U.K. Brexit Secretary Dominic Raab was quoted as saying a Brexit deal should be signed within three weeks.

The report is being widely attributed to being behind a jump in the value of the Pound.

“No Halloween scares today, instead we finally have a concrete date from Raab regarding a Brexit deal being finalised, and the Pound has jumped in response," says Hamish Muress, a currency analyst at OFX in London.

The claim by Raab was however actually made three weeks ago in a letter to a parliamentary oversight body but only released on October 31. Therefore, the letter was immediately dated.

It should perhaps therefore come as little surprise that Raab's office soon issued a statement clarifying that he did not in fact envisage a concrete date for negotiations to complete by.

Regardless, markets are taking the positives as an excuse to maintain some exposure to Pound Sterling: while traders, investors and corporates are fearful of holding Sterling in the event of a 'no deal' they are also concerned of not holding Sterling in the event of a Brexit breakthrough.  

Looking ahead, Muress says currency markets will have to wait to see if Raab's date can be stuck to, and if anything leading up to November 21st may cause more market jitters.

"Either way, we have long maintained that the Pound is a stickler for Brexit details, and in the last few weeks we’ve seen very few updates, particularly since the EU Summit. The announcement today from Dominic Raab will be welcome news for many, providing a reprieve for the pound in the face of the surging Dollar, which has seen GBP/USD lose over 3.5 % in a matter of weeks," says Muress.

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