Sterling jumped and British stocks rose as traders placed bets on the UK striking a post-Brexit trade deal with the EU before Christmas.
The currency, which had hit a two-year high above $1.36 last week, advanced 1 per cent on Wednesday to $1.3493 on signs that significant progress had been made in trade talks between Brussels and the UK. Against the euro, the pound rose 0.8 per cent to €1.1072.
Boris Johnson, UK prime minister, was expected to confirm the deal early on Christmas Eve. EU and UK officials worked through Wednesday night to finalise the legal text, which will preserve tariff-free trade in goods between the bloc and the UK.
London’s benchmark FTSE 100 index closed up 0.7 per cent, while the FTSE 250 index of mid-cap companies, which is considered to be more sensitive to fluctuations in the UK economy, rallied 1.7 per cent.
Investors also shifted out of haven assets, such as UK government debt, sending the yield on the 10-year gilt up 0.1 percentage point to 0.29 per cent, its biggest daily rise since March.
Derek Halpenny, currencies strategist at MUFG in London, said “hopes have been raised once again that progress has been made and that an announcement could come as soon as tonight”.
“With many issues now resolved, according to reports from Brussels, the haggling over fishing appears to be what still needs to be agreed,” said Mr Halpenny. “If those reports are correct, then surely at this stage a positive outcome is most likely.”
Lorries also began trickling across the English Channel in the early hours of Wednesday, ending a blockade triggered by fears over a new variant of coronavirus discovered in Britain. The disruption to crucial freight routes had helped to send the pound tumbling below $1.32 on Monday, with concerns over the trade stoppage adding to angst over Brexit talks.
“Sterling trades between the two extremes of there being no-deal, where the pound goes to $1.10, and one being announced, where the pound heads towards $1.50,” said Savvas Savouri, chief economist of hedge fund Toscafund, which is bullish towards UK assets.
Nadège Dufossé, head of cross-asset strategy at Luxembourg-based fund manager Candriam, said European equity markets were also trading higher because of the prospect of a Brexit trade agreement.
“Our main scenario remains that of a last-minute deal,” she said, but she added that “we’ve bought some protection in the options market against it”.
For the second consecutive day the Stoxx Europe 600 index closed higher, with the continent-wide benchmark up 1.1 per cent.