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Sterling soars to 7-week high on optimism of a Brexit breakthrough

Key Points
  • Sterling has risen 4% against the dollar in just 8 days.
  • Traders are interpreting that Britain is now less likely to leave the European Union without a deal.
  • British Prime Minister Boris Johnson is due to meet with EU Commission President Jean-Claude Juncker in Luxembourg on Monday.

Sterling rose to its highest level since late July on Friday as momentum appeared to swell behind the idea that Britain won't leave the European Union without a formal deal.

Shortly after11 a.m. in London, the pound had risen 1% for the session to reach $1.2456. Sterling is now up more than 4% versus the dollar since September 3, when it reached a three-year low.

The main driver behind buying appeared to be a newspaper report in The Times newspaper that suggested that the Democratic Unionist Party is softening its opposition to a Northern Ireland-only backstop.

The DUP has long rejected the backstop — an insurance policy against any hard border within Ireland — as any part of the Brexit process. DUP leader Arlene Foster once described her party's opposition as a "blood red" line.

Foster again discredited the prospect of a Northern Ireland-only backstop on Friday and derided the Times report, stating "anonymous sources lead to nonsense stories."

Despite that rebuttal, sterling clung on to its gains and even took a further leg higher.

Kit Juckes, chief foreign exchange strategist at Societe Generale, said in his daily research note Friday that the Times report had triggered some traders to cover off their short positions on sterling. Short positions are where traders bet against an asset, believing it will fall in price, in order to make a profit.

Juckes cautioned that it was now "very late in the day" for U.K. Prime Minister Boris Johnson to arrange a fresh deal that would satisfy lawmakers in Belfast, London and Brussels.

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Sterling's recent rise has been underpinned by the passing of a law on Monday which aims to stop the U.K. exiting the EU with no deal on October 31.

Prime Minister Boris Johnson has claimed the law, drafted and voted through by MPs of different parties, will tie his hands when trying to negotiate with Brussels. There has been some suggestion that his government could ignore the law or find a loophole that allows "no deal" to remain as an option.

John Bercow, the outgoing speaker of the House of Commons, said late Thursday that he would work to prevent any such wriggle room for the government.

Bercow said he was prepared to allow "additional procedural creativity" to ensure that MPs, and not the U.K. government, had the ultimate say on the final shape of Brexit.

"If I have been remotely ambiguous so far, let me make myself crystal clear. The only form of Brexit that we have, whenever that might be, will be a Brexit that the House of Commons has explicitly endorsed," said Bercow.

British Prime Minister Boris Johnson is due to meet with EU leaders at a crucial summit on October 17 and 18, where he is expected to renew negotiations for a Brexit deal before Britain's scheduled departure from the bloc on October 31.

Prior to that he will meet with EU Commission President Jean-Claude Juncker in Luxembourg on Monday.

Now watch: Sterling and euro to rebound in 2020

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