Sterling extended earlier gains after a report that the UK and the European Union could agree on a trade and security deal some time next week. Optimism regarding striking an agreement has given the pound fresh impetus, despite that time is running out.

Economists believe that Sterling could strengthen more by mid-2021 if a free trade agreement is reached, as officials are expecting news of some form of progress as early as Monday. British and European parliaments will still need to confirm the terms of the agreement before the transition period ends on 31 December. At the moment, investors remain hopeful, but the possibility of the talks stalling as major differences cannot be bridged is strong, and in such a scenario the pound would likely fall.

Newspaper reports suggest a trade deal is possible

During the week, various newspaper reports have suggested that a trade deal is "just days away" with the Telegraph saying that Ireland believes there are "landing zones" for an agreement and that France has accepted the restrictions to its fishing rights in UK waters after the transition period ends. The newspaper also reported that "the trade agreement could be announced as early as Monday, sources in Brussels suggested – but only if both sides made compromises on issues such as fishing and subsidy law." On Tuesday, the Sun newspaper said a deal could be expected next Tuesday, as the UK Chief Negotiator David Frost said to the Prime Minister Boris Johnson to prepare for a trade deal on Tuesday, news that have helped lift the pound.

Despite positive but unofficial reports in British newspapers, both the EU and UK have not offered a definite answer about the status of the negotiations which means the possibility of a no deal is still a valid outcome with some analysts remaining very cautious. At the same time, the markets seem to have made peace with a possible no-deal scenario, so any news of a deal, no matter what that deal is, will lift the pound. However, a possible deal will only mean temporary and limited gains for the pound according to some analysts, while for others, a considerable rise should be expected.

Brexiteers feel stuck as no deal impossible

The UK is now trapped and will be unable to benefit from Brexit, said former Brexit Party MEP Ben Habib. Habib, who attacked the PM saying that a no deal Brexit was not possible, said in an interview to, that "We are already stuck, to some extent, in the gravitational pull of the European Union.” For hard Brexiteer Habib, a no deal Brexit would allow the UK to completely cut its ties to the European Union, but, unfortunately, this is not possible anymore. As he said, "We have a deal of some description from which we simply cannot escape."

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