Sterling rally fizzles out as investors focus on obstacles ahead

Sterling hit a six-month high on Friday after the UK and the EU reached agreement on the Border post-Brexit, but the currency dipped after traders digested the meat of the deal.

The optimism among traders in early morning drove the currency to a high of 86.90 pence against the euro, before it gradually slipped back to end the day at just under 88 pence.

“The deal announced in Brussels this morning significantly reduces the chances of a ‘hard Brexit’ which is good news for the UK economy, and therefore sterling,” Merrion economist Alan McQuaid said.

“It should also make it easier for the Bank of England to hike interest rates again if needed to combat inflation, and again a positive for the pound,” he said.

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“ But we still have to see how things play out on the Brexit front and the fallout from next week’s EU summit. Taking everything into consideration, I think sterling will hover around the 86-88p level between now and year-end,” he added.

The Commission's announcement came after prime minister Theresa May and Brexit Secretary David Davis made an early-hours journey to Brussels to meet European Commission president Jean-Claude Juncker and the European Union's chief Brexit negotiator, Michel Barnier.

Brussels said enough progress had been made after the two sides worked through the night to reach a deal over the status of the Irish Border, which had scuppered an earlier attempt to clinch a deal on Monday.

However, many analysts suggested negotiators faced bigger obstacles ahead.

Hamish Muress, currency analyst at OFX, said: “The pound rose against both the euro and the dollar this morning, in the wake of the news that “sufficient progress” had been made on Brexit negotiations for them to move on to the next stage.

“However, the resulting rally in sterling has been slightly cut short, as the market begins to digest the details of the announcement. The reference that ‘nothing is agreed until everything is agreed’ in particular has stemmed the interest of traders,” he said.

Nonetheless, Mr Muress said a new trading range for sterling could be on the cards if negotiations move forward at a steady enough pace in 2018.

Business groups reacted with relief to the news. Stephen Martin, director-general of the Institute of Directors, said: “It went right down to the wire, but businesses will be breathing a huge sigh of relief that the UK and European Commission have reached agreement on phase one issues, putting us in a good position going into the Council meeting next week.” However, attention will now turn to trade and Mrs May faces another race against the clock to secure a trade deal that delivers the “exact same benefits” of the single market, which her Government has promised the British electorate. Britain is due to exit the single market and customs union in 2019.

But RBC strategists said Brexit negotiations aside, the economy remained in a fragile state with the Bank of England’s November hike seen widely as a “one and done” thing. “Political risk for

sterling also remains elevated, though markets may have lost sight of this given the improving prospects of Brexit negotiations moving forward at the mid-December European Council meeting," RBC Capital Markets strategists wrote in a 2018 outlook note.

Reuters