Sterling on track for weekly gain as Brexit negotiations intensify

LONDON (Reuters) – The pound fell against the dollar and euro on Friday after the UK Purchasing Managers’ Index (PMI) fell to a four-month low, but was still set to end the week up, after a new phase of intense Brexit talks restarted.

FILE PHOTO: A British pound note is seen in front of a stock graph in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration/File Photo

The pound gave up some recent gains after an early flash PMI reading – a gauge of private sector growth – fell to a four month low of 52.9 in October from 56.5 in September.

Britain’s economic recovery from the COVID-19 shock was already beginning to falter in August.

Since then, new cases have risen rapidly, raising concerns that a second wave, combined with a possible no-deal Brexit, pose a double-whammy of downside risks.

The pound took a hit from the PMI data, as well as overnight news that consumer confidence had fallen to the lowest since May, said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

“I think it does play into that narrative that the macro support for sterling in Q4 is going to look increasingly challenging,” he said.

At 1431 GMT, the pound was at $1.3031, down 0.4% on the day but up 0.9% on a weekly basis.

The pound was at 90.77 pence per euro, having slipped around 0.5% on the day by 1432 GMT.

Analysts say trade talks between Britain and the European Union are the primary driver of the pound. Britain left the EU in January and is in a status quo transition period, which ends on Dec. 31.

Sterling had its best day in seven months on Wednesday, surging 1.7% against the dollar, when Britain and the EU said they would start a new phase of negotiations.

Prime Minister Boris Johnson’s spokesman had said a week earlier that talks were over – a move markets saw as brinkmanship.

“Anything that brings a deal – any deal – closer to the table is going to see sterling strengthen. Anything that highlights the risk of no deal is going to see sterling weaken,” said John Goldie, an FX dealer at Argentex.

He added that this week’s moves suggest the dynamic is skewed, as sterling rallied more on positive news.

The pound was briefly boosted by news that France was willing to compromise on the issue of fisheries – a key sticking point in negotiations.

Reporting by Elizabeth Howcroft; Editing by Timothy Heritage, Andrew Cawthorne, William Maclean