The pound stabilised on Tuesday after Mondays sharp rebound as market participants grew more optimistic about the chances of a Brexit deal, but implied volatility gauges pointed to further price swings ahead as the Dec. 31 Brexit deadline approaches.
Sterling dropped to as low as 1.3135 last Friday and implied volatility surged to its highest since March, when British Prime Minister Boris Johnson said a nodeal was very very likely.
It then rebounded to as high as 1.3444 on Monday as market participants were relieved that negotiators agreed on Sunday to go the extra mile to try to reach a deal in the coming days and the European Unions chief Brexit negotiator said a deal was still possible.
At 0840 GMT on Tuesday, the pound was at 1.3306 versus a slightly stronger dollar, down around 0.2 on the day, as traders waited for further updates on negotiations.
Versus the euro, it was steady at 91.235 pence.
Following its rebound yesterday, GBP has now stabilised, pencilling in lower odds of a negative outcome from the UKEU trade negotiations, ING FX strategists wrote in a note to clients.
The postweekend progress in negotiations is now priced into the pound, they said, adding that they expect eurosterling to stabilise around 0.9100 in Tuesdays session.
Britain and the EU have just over two weeks left to negotiate a deal covering nearly 1 trillion in annual trade before Britain loses zerotariff zeroquota access to the blocs single market on Dec. 31.