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 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 of both Royal Bank of Scotland Group PLC and Lloyds Banking Group PLC up more than 10% and Barclays PLC up 5%.

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

"I have received promising signals from the [Irish] 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 for a deal to be sealed before the Oct. 31 deadline.

However, "something meaningful" had clearly been accomplished in the meeting between Ireland's Leo Varadkar and Britain's Boris Johnson, said Derek Halpenny, head of research global markets at MUFG Bank.

A Brexit deal is now more likely to be passed by parliament because key euroskeptic lawmakers believe Mr. Johnson will pursue a looser long term relationship with the EU than his predecessor Theresa May, said Jordan Rochester, currency strategist at Nomura Bank.

While the pound climbed on the signs of a breakthrough, it is unlikely to return to the strength seen before 2016's EU referendum. The currency has fallen close to 17% against the dollar since the vote, and the greenback has gained in strength.

"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," said John Wraith, head of U.K. rates strategy at UBS Group AG.

UBS expects the pound to remain in a range from $1.05 to $1.50 in scenarios ranging from a hard Brexit to a new referendum in which the U.K. remains 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," Mr. Wraith said.

UBS recommends that clients stay light on risk for the pound and buy put options, a type of insurance against sudden price moves, for the euro against the dollar, as the bank expects that currency pair to react to future Brexit headwinds.

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

 

(END) Dow Jones Newswires

October 11, 2019 09:02 ET (13:02 GMT)

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