Banks turn more optimistic on Brexit deal as mood music improves

LONDON (Reuters) - Major investment banks said on Friday they had become more optimistic on the prospects for a Brexit deal, following an upbeat meeting between the British and Irish leaders that buoyed the pound.

Irish Prime Minister Leo Varadkar on Thursday said that a withdrawal agreement could be clinched by the end of October, which would allow the United Kingdom to leave the European Union in an orderly fashion.

EU negotiator Michel Barnier and his British counterpart Stephen Barclay, meanwhile, held a “constructive” meeting on Friday, both the British and EU sides said.

The pound, British stocks, bonds, and Irish government bonds rallied, as investors scrambled to cover short positions, with the British currency hitting its highest levels in over three months. It was trading at $1.2622 at 1206 GMT. [GBP/]

Deutsche Bank said it was no longer negative on the pound.

“This represents a significant change of tune by the Irish government, that has so far been relatively pessimistic about the prospect of talks moving forward,” Deutsche's foreign exchange strategist, Oliver Harvey, told clients.

JPMorgan meanwhile predicted a deal would be struck, noting the two sides appeared to have found a solution to the thorny Irish border issue. The bank now sees a 50% chance of a withdrawal agreement being struck with a “modified/time-limited” Irish backstop.

It had previously put the likelihood at just 5%.

Some remain doubtful. For one, time is short and any deal Johnson brings back from Brussels will need the British parliament's approval, especially from hardline pro-Brexit factions.

The British government is therefore likely to request an extension to the Brexit deadline and then hold a general election, UBS Wealth Management said. But it acknowledged that the chances of a Brexit agreement had nonetheless increased.

“The chances of a deal seem to have improved and the pound has moved accordingly but hurdles still remain,” said Dean Turner, economist at the wealth manager.

“Time to thrash out the details of the deal are tight, and then there is the question of parliamentary approval.”

A deal would prolong the rally in the pound, Turner said, predicting sterling would hit $1.35 and trade in the “low 80s” against the euro if there was an agreement.

Goldman Sachs was ahead of the bunch however, sending a recommendation late last Friday for clients to buy sterling against the dollar, with a target of $1.30 compared with the then spot pound value of around $1.23.

They assessed the probabilities of a Brexit deal being struck at 60%.

Political risk consultancy Eurasia Group raised its probability of a Brexit deal from 5 to 10%. But barriers to one were still substantial, they cautioned.