Pound Sterling Extends Rally vs. Dollar, Euro on Irish Border Progress, but DUP Issues May with Warning

Ireland border issue

"EU leaders are preparing to offer a two-year Brexit transition deal as early as January after negotiators said that they were close to a breakthrough over the Northern Ireland border." - The Times.

The British Pound trades higher as reports of further progress on outstanding issues in the first stage of Brexit negotiations are met by renewed buying interest.

Markets bid the Pound to fresh tw-month highs against the Dollar and multi-week highs against the Euro on Thursday, November 30 on reports that the question of the Irish border appears to have been dealt with to an extent which will allow Brexit talks to progress to the next stage.

The Times reports British officials tabled proposals this week to avoid a hard-border in Ireland that could unblock the last remaining major obstacle to a deal.

The Pound will have liked the observation that "EU leaders are preparing to offer a two-year Brexit transition deal as early as January after negotiators said that they were close to a breakthrough over the Northern Ireland border."

"GBP soared after the Times reported that negotiators are close to a breakthrough on the difficult problem of the Irish border. If the two sides agree, E.U. leaders reportedly could offer Britain a two-year transition arrangement as early as January. The news triggered a lot of stops that pushed the currency higher. This would be tremendously bullish for Sterling," says Marshall Gittler at ACLS Global.

“After sufficient progress on withdrawal we will open the next two phases of negotiations, first of all on a transition period and then on the future partnership,” a senior EU negotiator told the Times. “A transition deal will be ready in principle for January.”

Progress on the Irish border follows news that both the U.K. and E.U. had arrived at a figure that would settle the U.K's outstanding financial liabilities once it leaves the Union.

The two sets of news have allowed the Pound-to-Euro exchange rate to advance towards 1.1368 which represents the top of its September-November range.

Looking at the market from the other direction, the Euro now buys less than £0.88; a key technical breakdown:

The Pound-to-Dollar exchange rate is meanwhile seen at 1.3466 - a two-month high.

The news comes as analysts maintain the Pound's outlook remains intimately linked to progress on Brexit.

"Greater clarity around Brexit arrangements as 2018 progresses should boost wavering business confidence, employment and investment. Given that uncertainty has been the biggest driver of GBP weakness, a rise in certainty may well support sterling," says Giulia Specchia at ANZ.

While the tone surrounding Brexit certainly has improved, those watching the Pound and currency markets in general must be wary of nasty surprises.

"The mood has changed following media reports that the EU and the UK have reached an agreement regarding the Brexit financial settlement. We now believe that a withdrawal agreement will be reached at the next EU summit in December, and that trade talks will be opened early next year," says Fabrice Montagne at Barclays in London.

But, any failure to reach this agreement is "likely to catch the market wrong-footed and could push businesses that are already close to their tipping points to implement their worst-case contingency plans," warns Montagne.

Barclays believe it is now very likely that the UK and the EU find agreement at the December summit, but should no deal be reached, "it could generate material downside for the economy as well as for markets".

Expect Sterling to be the prime conduit of market disappointment.

A reminder that the task of securing the Irish border issue is not yet done comes in the form of a warning from Northern Ireland's DUP party, late on Thursday.

Northern ireland's dup - a key ally of the Conservative party in Westminster - has given the UK government a warning over doing a deal with the EU over Irish border, report Sky News.

According to reports, DUP representatives met the U.K. government and said signing any Brexit commitment for northern Ireland to stay in single market, customs Union or regulatory equivalent “would be deeply destabilising" to deal that keeps PM may in power

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