Sterling enjoyed a brief rally on Thursday after reports that Britain would tell Brussels it was prepared to stay in the European Union's customs union beyond a Brexit transitional arrangement. Cabinet ministers are deadlocked over a future deal with the bloc. The Telegraph newspaper said Britain would tell Brussels it was prepared to stay in the union beyond the end of a post-Brexit transition period in 2020.
That helped sterling rise half a percent to a two-day high though the currency later relinquished most of its gains as the dollar strengthened. Prime Minister Theresa May said on Thursday Britain would leave the EU customs union after Brexit but a source said London was considering applying the bloc's external tariffs for a period beyond December 2020. At GMT 1500 sterling was up 0.1 percent versus the dollar at $1.3502 and up 0.2 percent versus the euro at 87.34 pence, close to a three-week high of 87.15 hit earlier in the session.
The pound's jump, though brief, suggests the currency remains vulnerable to Brexit's tos and fros, even as the UK economy has shown signs of strengthening. "This again proves that sterling benefits the closer the Brexit scenario under discussion resembles the status quo," said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.
Reichelt said concerns over a hard Brexit and the possibility of a hard Irish border could weigh on the pound. Britain is due to leave the EU in March next year although it has secured a transitional arrangement to keep its trade ties with the bloc unchanged until the end of 2020, as long as a permanent deal can also be reached in the coming months.
Ministers have discussed keeping the UK tied to EU customs rules for longer as a way of avoiding a hard Irish border. Other analysts said uncertainty surrounding Brexit posed obstacles to the Bank of England's attempts to normalise monetary policy. "Were it not for Brexit the Bank of England would have hiked interest rates already this year. I don't see much downside risk for the pound though because it is still a very undervalued currency," said Peter Kinsella, currency strategist at Commerzbank.
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