Pound traders are more upbeat on the outlook for Brexit as the government and opposition Labour party hold a crunch meeting to try and reach a deal.
One-week risk reversals on the pound-dollar pair, a measure of market positioning, signal investors are the most optimistic on the pound in almost five months. There is only around a one-in-three chance of the talks between Labour and the ruling Conservatives ending in success, according to strategists at MUFG and Mizuho Bank, but if they do, the pound will get a boost.
“Market participants have been skeptical over the prospect of a cross-party deal,” said Lee Hardman, a strategist at MUFG. “The pound could strengthen by a further 2% to 4% if a compromise deal is reached and it is passed through Parliament.”
The Conservatives and Labour have been in discussions for more than a month, but the poor performance of both political parties in local elections last week has increased expectations that they may strike a deal. If the negotiations fail, the chances of a general election or a second referendum may increase.
The UK currency held little changed at $1.3092 as of 11:12 London time. One-week pound-dollar risk reversals traded at 52 basis points in favor of calls, after earlier touching 65 basis points, the highest since January 15.