Monday, 19 March 2018

Sterling gains as Britain, EU seal Brexit transition deal

LONDON (Reuters) - Sterling surged on Monday as Britain and the European Union agreed on a post-Brexit transition period and said that their divorce treaty would include an emergency “backstop” to avoid a hard border in Ireland.

The pound, which had already been rallying on expectations for a transition deal, gained further after the announcement by British Brexit minister David Davis and EU chief negotiator Michel Barnier.

Against the dollar it rose as much as 1 percent to $1.4088, its strongest since Feb. 16 and the biggest one-day rise since January.

“You now have a credible timeframe for reaching a full trade agreement,” MUFG strategist Derek Halpenny said.

The headlines and sterling’s reaction suggested a transition agreement had been reached more easily than the market had expected, he said.

Investors had largely expected Britain to secure a transition agreement at Thursday’s EU summit, but concern remained that a deadlock over the Irish border would derail a deal.

Securing the terms of a transition phase was vital, because it means London and Brussels can now focus on what trading relationship the two sides have after Britain leaves the EU next year.

A transition deal also means little change in trading between the Britain and the EU between Britain’s exit and the end of 2020.

Sterling faces a pivotal week, with the Bank of England announcing an interest rate decision on Thursday after inflation and wages data. It is expected to keep rates on hold but to prepare the market for a possible increase in May, a rise it had signalled as contingent on a transition agreement.

Viraj Patel, an analyst at ING, said the pound could rise as high as $1.43 this week if economic data also supported sterling and the Bank of England sounds more hawkish than expected.

Analysts at UBS said sterling could rally as far as 85 cents per euro.

Analysts do not expect the BoE to serve up any surprises, but will be looking at both consumer inflation data, due on Tuesday, and wage data due on Wednesday for any sign of inflationary pressures building in the economy.

“Despite modest growth and moderating inflation, the BoE is likely to reiterate its intention to gradually raise rates as it sees limited slack in the economy. Now that a transition deal has been tentatively agreed, it may motivate more hawkish language from the BoE,” UBS analysts told clients.

Reporting by Tommy Wilkes

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