By Anna Isaac and Caitlin Ostroff 
 

Signs of optimism that the U.K. could reach a divorce deal with the European Union drove the pound and U.K bank stocks sharply higher Friday.

Sterling climbed as much as 1.7% against the U.S. dollar on talk of a breakthrough between the two sides after months of worsening relations, causing investors to review their bets on the currency losing further value. U.K. bank stocks rallied hard with shares in Royal Bank of Scotland Group PLC (RBS.LN) and Lloyds Banking Group PLC (LLOY.LN) rising more than 10% and Barclays PLC (BARC.LN) gaining 5%.

Investors attributed the sharp rise to positive remarks from Donald Tusk, European Council President. He said that the Irish taoiseach and the UK prime minister "saw for the first time a pathway to a deal."

"I have received promising signals from the taoiseach that a deal is still possible," Mr. Tusk said Friday.

Analysts agreed that there were still hurdles to be overcome in the Brexit process in order for a deal to be sealed prior to the Oct. 31 deadline. However, "something meaningful" had clearly been accomplished in the meeting between Leo Varadkar and Boris Johnson, Derek Halfpenny, head of research global markets at MUFG Bank said.

A deal is more likely to be passed by parliament than previous attempts because key euroskeptic groups of lawmakers believe Mr. Johnson could pursue a looser long-term relationship with the EU than his predecessor Theresa May.

However, while the pound climbed 1% on the signs of the breakthrough, it is still unlikely to return to pre-referendum strength. The currency has still lost close to 17% of its value against the U.S. dollar since the vote, and the greenback has gained in strength in recent years, analysts said.

"Looking at the longer-term picture, we are still very much in the range for sterling that we've been in for the three-year period," John Wraith, head of U.K. rates strategy at UBS Group AG, said. UBS still expects the value of the pound to be in a range of $1.05 to $1.50 in scenarios ranging from a hard Brexit to a new referendum and the U.K. remaining in the EU.

"Most likely is this what we're calling the middle ground where we sort of limp around with one extension after the other or we then get a deal that sees the U.K. go into transition," he said.

UBS has started recommending that clients stay light on risk for the pound and put options--a type of insurance against sudden changes in price moves--against the euro or dollar as it expects that to react to Brexit headwinds in the future.

 

Write to Anna Isaac at anna.isaac@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com

 

(END) Dow Jones Newswires

October 11, 2019 08:14 ET (12:14 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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