Pound Jumps as Draft Post-Brexit Agreement Signals Deep Ties

(Bloomberg) -- The pound jumped as a draft accord between the U.K. and European Union backed a free-trade pact and close cooperation after Brexit.

Sterling gained more than 1 percent to a one-week high after the declaration removed some uncertainty about the relationship after the U.K. leaves the bloc, its largest trading partner. The statement on futures ties, being negotiated ahead of an EU summit on Sunday to sign off on a Brexit deal, also makes clear that both sides have a "determination" to replace the contentious backstop to avoid a hard border with Ireland.

“Headlines seem to be ticking the right box with regard to FX sentiment, talking about free trade,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA.

Still, the news is not enough to erase doubts about whether the divorce agreement will be approved by lawmakers in the House of Commons during December.

“The vote in parliament is still the main challenge,” said Mikael Olai Milhoj, an analyst at Danske Bank. Neil Jones, head of hedge fund currency sales at Mizuho Bank, said investors were taking advantage of the rally and selling sterling as they remain skeptical of the prospects for the parliamentary vote.

The pound rose as much as 1.2 percent to $1.2927, its strongest level since Nov. 15, and was trading at $1.2870 as of 12:18 p.m. London time. It gained 0.6 percent to 88.59 pence per euro. U.K. government bonds fell, with the 10-year yield rising three basis points to 1.42 percent, while the benchmark FTSE 100 Index dropped 1 percent.

In an indication of the fragility of any gains in the currency, the pound briefly pared most of Thursday’s gains after the EU said some Brexit issues have yet to be resolved.

U.K. Prime Minister Theresa May, who has taken over the final round of Brexit negotiations, is aiming to please rebels in her party and Northern Ireland’s Democratic Unionist Party, which she relies on for her parliamentary majority. Brexit-supporting lawmakers have opposed language in the draft divorce deal on a fallback arrangement for the Irish border, raising the risk Parliament will vote against it next month.

"‘Determination’ to replace the backstop seems targeted at the DUP," said Bennett. “If they are convinced by the statement they could fall back in line and decide to vote for the agreement in December.”

To contact the reporter on this story: Shoko Oda in London at soda13@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Anil Varma

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