City investors are bracing for a volatile week after Boris Johnson and Ursula von der Leyen stepped back from the brink of a no-deal Brexit. The decision to “go the extra mile” and continue talks beyond the weekend removed the immediate threat of UK-EU trade talks collapsing on Sunday, which hit stocks and the pound hard on Friday. The pound rose in early trading on Sunday evening, gaining more than a cent against the US dollar to around $1.335 at the start of trading in Asia. Adam Seagrave, global head of sales trading at Saxo Markets, said there was an element of relief that the “cliff-edge” was avoided over the weekend. “Continued negotiations points to the possibility that both sides feel there is still some room to get a deal over the line,” said Seagrave. “Most of last week was spent pricing in the increased likelihood of a no-deal Brexit, and while that still remains a very realistic possibility, I expect the market will take some comfort from a perceived willingness to find a resolution,” Seagrave added. But uncertainty over the UK’s future is still likely to drag on the currency, and equities, as the drama continues to play out. “This is not a reason to be popping champagne corks,” said Jeremy Thomson-Cook, chief economist at Equals Money, adding that extending the talks deadline is a “slight positive”, but not a big win for investors. Thomson-Cook warned that the markets will become more volatile as the end of the withdrawal agreement approaches. “It’s a dance we’ve danced before. The more and more we do this, the closer we get to the only real deadline, which is 31 December.” “Brexit doesn’t go away on the 31st, we just have to live with it,” he said, adding that the chaos at UK ports and supply chains show that companies haven’t had the time or investment necessary to make the process run at all smoothly. Rupert Thompson, chief investment officer at Kingswood, predicted that any market rebound was likely to be minimal. “News that the Brexit talks have been extended yet again is unlikely to lead to much of a market reaction because, as Boris Johnson continues to point out, a no-deal scenario remains very much the most likely outcome – as was the case in the run-up to the weekend,” Thompson said. City consultancy Capital Economics predicts that the pound would plunge against the US dollar in a no-deal scenario to around $1.15, and drop below parity with the euro. This would push up inflation, reducing real household incomes next year. “No new ‘deadline’ has been set, so there could be some political and economic fireworks one way or another on New Year’s Eve,” said Paul Dales, the consultancy’s chief UK economist. But, Dales also believes there’s more chance of a “cooperative” no deal, if a late agreement can’t be reached in time. “A ‘no deal’ would most probably involve all those agreements in the Withdrawal Agreement [the financial settlement, citizens’ rights, Northern Ireland], the substantial progress made on financial services equivalence and the rollover of the bulk of the UK’s third-party EU trade deals,” Dales said. But even such a “cooperative no-deal” would involve disruption at the border, with new customs checks as well as tariffs, which is why business groups continue to urge the government to reach an agreement. Shares in UK companies would likely plunge in a no-deal scenario, with bank Morgan Stanley predicting last week that the domestically focused UK FTSE 250 index could tumble by 10%.