Pound, gilt traders face ticking clock to EU meet

The UK must submit a proposal on the contentious Irish border issue by Wednesday

The pound benefited in recent days from optimism that Britain and the European Union are getting closer to a Brexit deal, but this week could test that view.

An October EU summit is fast approaching and the UK must submit a proposal on the contentious Irish border issue by Wednesday to allow envoys of the bloc to begin preparations ahead of the meeting.

Any confirmation that the two sides will be able to work out their differences would push the pound higher and fuel a further slide in gilts, say strategists and fund managers.

The EU is set to offer the UK a free-trade deal deeper than any agreement that’s gone before, but will reject British Prime Minister Theresa May’s demand for “frictionless trade” according to EU diplomats. The bloc’s vision for future ties with Britain will contain “about 30-40 per cent” of May’s pitch for a wide-ranging trade and security deal, two diplomats said.

“The mood music is clearly more positive, but this is the first of three possible summits where we can agree the withdrawal agreement and the outline of the future relationship,” said Investec Asset Management portfolio manager Russell Silberston. “I’m not sure anything else matters for the pound.”

Sterling gained toward the end of last week. Still “the pound’s recovery potential will remain limited until we clearly get one of the parties to back down on its ‘red lines’,” Commerzbank AG strategist Thu Lan Nguyen said. “I expect the downtrend in euro-sterling to slowly fade out,” she added.