The pound began its recovery on Thursday when Brexit talks between Prime Minister Boris Johnson and Mr Varadkar sparked some initial optimism, with both leaders agreeing they could see “a pathway to a possible deal”. UK Brexit Secretary Stephen Barclay then attended Brussels for talks with the EU chief negotiator, Michel Barnier, after which Mr Barnier told reporters to “be patient”, and added: “Brexit is like climbing a mountain. We need vigilance, determination and patience.”
Spurred by optimism, the GBP/EUR exchange rate climbed to its highest level since May this afternoon as the EU gave the go-ahead for more “intensified” talks.
FX strategist at Societe Generale, Kenneth Broux said: “We’ve seen quite a bit of volatility this morning after the melt-up yesterday. The market is very thin. I think it’s very important to specify that Sterling liquidity is very thin so volatility is high. The obvious conclusion is that we’ll see a squeeze higher.”
Meanwhile, the euro slumped as Germany ended the week with yet another disappointing data release.
The bloc’s largest economy saw annual harmonised consumer prices rise by 0.9 per cent, far below the European Central Bank’s target of close to 2 per cent.
Month-on-month inflation edged down -0.1 per cent as expected, but this had little effect on the GBP/EUR pairing as Brexit optimism sent the pound soaring.
Looking ahead to the start of next week, the single currency could slump further following the release of August’s industrial production data.
If this falls further than expected, the euro could extend its losses against the pound.