The pound had its biggest two-day rally against the dollar since the Brexit vote as hopes rose that a deal could be struck before the deadline later this month.
Sterling climbed to the highest level in three months against the US currency, briefly hitting $1.27, amid mounting optimism in the City, after the EU’s chief negotiator, Michel Barnier, said talks could progress to the next phase.
The pound has risen four cents against the dollar since Thursday, when Boris Johnson and the Irish taoiseach, Leo Varadkar, agreed there was a “pathway to a possible Brexit deal”. That is the sharpest two-day rise in the pound since the EU referendum more than three years ago.
While several pitfalls remain, the pound also hit a near five-month high against the euro of €1.1465.
Oliver Harvey, an analyst at Deutsche Bank, said: “We cannot recall a time during the Brexit process of the last year at which the Irish government raised expectations to this extent.”
The surge in the pound on Friday pushed it back above $1.26 for the first time since Boris Johnson became leader of the Conservative party.
Dean Turner, economist at the Swiss bank UBS, said a Brexit extension and general election was still probably the most likely outcome. He said the pound would trade between $1.25-$1.29 under such a scenario, but could soar to $1.35 if an eleventh-hour deal was struck, or tumble should talks break down.
“The news will have cheered sterling investors, but we recommend they remain nimble with much still uncertain as the sand in the Brexit hourglass continues to run down,” he said.
The pound still remains heavily down from its level before the Brexit vote, by around 15%, in a reflection of the lingering risks posed by leaving the EU and the broader weakness in the UK and global economy.
Shares in UK-focused companies also surged on Friday, on hopes that a disorderly Brexit could be avoided.
Bank shares led the rally, with Lloyds Banking Group jumping 12% and Royal Bank of Scotland up 11.4%. Housebuilders also posted sizeable gains, with Persimmon closing 10.8% higher. Holiday firm Tui, high street chain Next and DIY chain Kingfisher all closed around 9% higher.
“The optimism surrounding Brexit has given British banks a boost as UK government bond yields have ticked up, bank’s lending margins usually improve in an environment of higher bond yields, hence why RBS, Lloyds, Barclays and HSBS are higher today,” explained David Madden of CMC markets.
“The fear of a disorderly Brexit has been hanging over the property sector,” he added.
The domestically focused FTSE index, which contains many medium-sized UK firms, surged by 4.2% on Friday, its biggest one-day jump since May 2010.
