Currencies: Pound rallies on Brexit hopes, as dollar looks at biggest monthly drop since July

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The British pound continued to gain on Thursday, moving higher as Brexit negotiators moved closer to yet another breakthrough on an issue that had proved to be a sticking point in talks.

Meanwhile, as dollar traders watched for news on the progress of tax reforms in Washington, the U.S. currency was facing its worst monthly performance since the summer.

Where are currencies trading?

The pound GBPUSD, +0.3803% rose to $1.3459, up from $1.3410 late Wednesday. Sterling is trading at levels not seen since late September, and it has gained nearly 1% this week so far against the dollar. For the month, the pound is up 0.42% against the dollar, as of Wednesday’s close.

Read more: How conflicting Brexit headlines sent the British pound on a wild ride

The ICE U.S. Dollar Index DXY, +0.13%  was up slightly at 93.207, while the broader WSJ U.S. Dollar Index BUXX, +0.16%  was also modestly higher at 86.76. The ICE index is on track to drop 1.4% for the month of November, which would be its worst performance since a 2.9% slide in July, according to FactSet data.

The euro EURUSD, -0.1519%  edged higher to $1.1859, compared with $1.1850 late Wednesday in New York.

Against the Japanese yen USDJPY, +0.39% the buck traded at ¥112.30, up from ¥111.92 late Wednesday. The currency pair was trading at levels not seen in a week.

What is driving the market?

The pound rallied anew on Thursday after The Times newspaper reported that Brexit negotiators were nearing a breakthrough on the issue of the Northern Ireland border, making it possible for the EU to offer a fast-tracked transition deal to the U.K. by January.

British officials have put forward a proposal to avoid a “hard border” between the U.K. province and the Republic of Ireland, the report said. In the past, the EU has said it needs to see progress on three issues — including the border — before withdrawal talks can move on to deal with trade and a transition period. The two other areas are EU citizens’ rights and the U.K.’s exit bill.

Earlier this week, media reports said London and Brussels had agreed on a Brexit divorce bill of around €50 billion, a significantly higher British offer.

These developments are seen as helping lift the deadlock on Brexit talks, which had sparked concerns the U.K. would crash out of the EU without a trade deal.

In the U.S., progress over the tax overhaul will remain a key focus for traders. The Senate voted on Wednesday to open a formal debate on the Republican tax bill, and a final vote could arrive as soon as Thursday evening.

A big sticking point is over the corporate tax rate and whether or not it should be cut by less than U.S. President Donald Trump wants.

What are strategists saying?

“Given the magnitude of the rally based on these expectations we see two possible scenarios: either a deal is announced soon and the pound is likely to extend its gains, but at a moderate pace as the markets are already pricing in an agreement, or it takes more time for a formal announcement to come, in which case traders will look to take profits off the table leading the pound to correct toward $1.34,” wrote Konstantinos Anthis, ADS Securities analyst, in reference to gains the pound has seen over expectations the EU and U.K. will reach an agreement over Brexit divorce costs.

What are the data?

Eurostat will release eurozone consumer prices for November, and German unemployment data is also ahead.

In the U.S., weekly jobless claims are due at 8:30 a.m. Eastern Time, along with readings on personal income, consumer spending and core inflation for October. The Chicago purchasing managers index for November is due at 9:45 a.m. Eastern.

Dallas Fed President Rob Kaplan will discuss real estate in a question-and-answer session at the Real Estate Council Speaking Series at 1 p.m. Eastern.

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