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The pound rose above $1.27 and was set for its biggest weekly gain against the dollar since the end of March on Friday, even though European Union and British negotiators said there had been little progress in Brexit trade talks.

Britain left the EU in January and there are just weeks left to extend a year-end deadline to reach a trade deal.

A transition arrangement that keeps previous rules in place during talks expires at the end of 2020 unless both sides agree to extend it this month, which Britain has said it will not do.

“The market thinks there’s still a better than 50% chance that we’ll muddle through again,” said Kit Juckes, FX analyst at Societe Generale, adding that the risk of not reaching a deal was a background worry for sterling.

The pound, which has gained more than 3 cents in a week, rose as high as $1.2705, its strongest since March 12.

Against the euro, which gained further after the European Central Bank’s latest stimulus plan, the pound reached 89.04 pence, having retreated from the 90 level it briefly broke above late on Thursday.

The pound has gained 5% against the dollar since reaching a low of $1.2075 in mid-May, but has been held back by Britain’s high coronavirus death toll, Brexit-related risks, the prospect of negative interest rates and a growing debt pile.

It gained when the Bank of England’s executive director for markets said that a negative interest rate would not be introduced in the near term.

“If the UK goes down the road of negative rates, it would be the first country with a negative current account deficit to do so, putting downward pressure on sterling,” Deutsche Bank economist Sanjay Raja and macro strategist Oliver Harvey said in a note to clients.

“This could see inflation jump at a time when the Bank is looking to shore up confidence and support the economy through the recovery,” they added.

The weakening dollar played a role in sterling’s rise.

“The Federal Reserve is employing massive monetary expansion, and political tensions in the US cement that stance even further. Both have already contributed to a rebound in GBPUSD and will continue to do so,” Thomas Flury, head of FX strategies, and Dean Turner, economist at UBS Global Wealth Management, said.

Reporting by Elizabeth Howcroft

Source: UK Reuters

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