London (CNN Business)The next day or two will be crucial for thepound, which has shot up in the past week but remains highly volatile.
A Brexit agreement “feels unlikely” to be reached on Wednesday during crunch talks between UK and EU negotiators, a government source has told CNN. The source says 10 Downing St is “guiding operationally not to expect anything tonight.”
Traders remain on edge asBritish Prime Minister Boris Johnsonracesto hammer out an agreement to take the United Kingdomout of the European Union before the October 31 Deadline. Johnsonneeds to come up with a deal before EU leaders meeton Thursday, and before the UK parliament convenesfor an extraordinary session on Saturday.
The pound was trading just above $ 1. (at 3: 26 PM ET on Wednesday, and analysts believe it could jump as high as $ 1. 35 or even $ 1. 40 if Johnson is able to secure a deal that avoids achaotic 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 alreadywreaked 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 economy by hitting business investment and manufacturing. According to the Center 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 thelack of clarityat a high-stakes moment.
The United Kingdom and European Union are 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 Irelandwithout 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 EU 27 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 that a big move for the pound could come late on Wednesday as the outcome of the talks becomes evident. The other option, he said, is that the currency reacts 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 Labor 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.
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