Sterling jumps to a three-day high on Brexit hopes

LONDON (Reuters) – Sterling rebounded on Wednesday after a two-week low, following a Bloomberg report that the UK and Germany were ready to abandon a key point in the Brexit negotiations.

Investors rushed to buy the currency after the report, bringing it to nearly 1% to hit a three-day high at $ 1.2983.

From top to bottom, the pound sterling rebounded by more than 1.2% on an intraday basis, as the latest news prompted investors to reduce their short bets.

Against the euro EURGBP = D3, the British currency rebounded by half a percent to 89.65 pence. The currency had difficulties earlier around $ 1.2787.

"Sterling jumped on stories suggesting that there is a change in the German government on Brexit's demands, making it more likely that there could be an agreement," said Jeremy Stretch, Head of Strategy G10 FX at CIBC Capital Markets.

"It took some of the risk premium of the pound."

Bloomberg quoted people familiar with the case saying that Germany would be willing to accept a less detailed agreement on the future economic and trade relations of the United Kingdom with the EU in order to reach an agreement on Brexit.

The UK was also willing to settle for a more vague statement of intention on the future relationship, postponing some decisions until the day after Brexit, according to one official cited in the report.

Jordan Rochester, an economist at Nomura, said the latest media reports would reduce market concerns for a difficult Brexit for now and encourage hope for a transition period that should be positive for sterling in the near term.

DOLLAR DRIVER

The pound has weakened since August, after reaching a one-month high of $ 1.3043 due to weak economic data, doubts about the leadership of Prime Minister Theresa May and the opposition from the European Union to the bloc's exit proposals.

This raised fears that the country would escape from the EU without a trade agreement in place, which many economists say would be disastrous for an already struggling economy.

A survey this week revealed weaker-than-expected growth in the British construction sector in August.

All this prompted investors to position themselves against the British currency at highs of over a year.

"The latest news seems to be another hurdle for the pound, but we need to see concrete progress before the pound reaches the peak of 2018," said Viraj Patel, currency strategist at ING in London.

UK government bond yields also rose, with 10-year yields up 4.1 basis points to 1.47% GB10YT = RR.

But market watchers have warned against reading too much of the latest reports, as a sell-off in emerging markets due to the resurgence of the dollar on fears of a rising trade war should allow verification of gains.

While the United States feared that the United States is preparing to impose a 25% tariff on $ 200 billion worth of Chinese goods when a public consultation ends Thursday, the dollar has advanced relative to the main currencies and emerging markets.

The more than 6% rise in the dollar against its competitors over the past six months has hit emerging market currencies hard. An emerging market currency index .MIEM00000CUS is trading at more than a year and has fallen nine per cent since late March.