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How a Brexit truce could send the pound to $1.40

The pound at $1.40? OK, bear with us…

Signs of a truce among senior UK government ministers and a shift in favour of a Brexit transition deal are not registering with investors, judging by the pound’s value. It was only marginally up against the dollar on Friday morning trading UK time – by 0.2 per cent – and it remains below $1.30.

But that should change, according to MUFG. Surprised by the market’s muted reaction to the latest Brexit developments, Derek Halpenny, its European head of global markets research, describes the emergence of possible consensus on a deal as “very significant”.

MUFG is bullish on sterling, and already had a target of $1.40 for the second half of 2018, “and this political development reinforces our belief in that level being achieved”, Mr Halpenny said.

Reports of Theresa May moving towards the idea of a transition deal, which is favoured by her chancellor Phillip Hammond, is one key development. The other is the shift towards this position from one of the Brexit hardliners, international trade secretary Liam Fox, who said on Thursday that waiting another two years to leave the EU would be “common sense”.

Mr Halpenny said: “This we would describe as being one of the most important Brexit developments since the vote took place in June last year.”

First, he said, it removed the prospect of a cliff-edge event in March 2019, the deadline for Brexit talks to conclude. Second, it reduced the risk of domestic political turmoil.

“Cabinet bickering could not go on. If PM May has managed to resolve this it greatly strengthens her position and therefore reduces domestic political risks,” Mr Halpenny said.

The pound is the worst-performing G10 currency this week, down 0.7 per cent, perhaps a reflection of the sticky Brexit negotiations in Brussels. It is also 2.3 per cent lower against the euro, partly because of market expectations for a withdrawal of stimulus by the European Central Bank, and partly because of Brexit rhetoric.

But there is a bigger picture, said Mr Halpenny. “…we are less concerned on the near-term assessment of negotiations and certainly conclude a cabinet truce and deal for a long transition phase is very sterling positive.”