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Sterling jumped in early New York trading on news that the UK and Ireland have reached a crucial compromise that will help pave the way for Brexit talks to reach their next stage.
The pound rose 0.44 per cent from Friday’s late levels to $1.3529. It had traded as low as $1.3420 earlier in Monday’s session. Gains were more vigorous against the euro, with the pound up 0.75 per cent at €1.1410.
The jolt higher came after news broke of a draft agreement that would maintain “regulatory alignment” between Northern Ireland and the Republic following the UK’s divorce from the EU. The wording provides Britain with more leeway since the prior guidance of “no regulatory divergence” would have implied wholesale acceptance of the rules of the EU single market and customs union.
Negotiations over Ireland have been a critical stumbling block for Prime Minister Theresa May and her chief Brexit negotiator David Davis. Last week, the UK also agreed to raise its offer on the so-called divorce bill to a level that has appeared to appease key players, including France and Germany.
In a further sign of progress, European Council president Donald Tusk tweeted that he was “encouraged” by his latest conversation with Irish Prime Minister Leo Varadkar on the matter. “Getting closer to sufficient progress”, he added, an indication that the discussions over the border may have given enough clarity to allow the UK and EU to start talking about the terms of a new trade deal.
Currencies traders have been closely watching every twist and turn of the Brexit negotiations, sparking fluctuations for sterling. Analysts said that a move to the next phase of talks over a trade deal would be bullish for the pound.
“If a green light is provided today for talks to move on to future relations, including a timely transition arrangement, it would open the door for further sterling gains in the near-term,” said MUFG strategist Lee Hardman.
The optimism on Monday also cascaded into the bond market. Investors sold UK government bonds in an extension of a move from last week in which traders bet that a more successful Brexit outcome would be bullish for economic growth, and potentially give the Bank of England more scope to raise rates.
Just after midday, the yield on the 10-year gilt rose 0.059 percentage point to 1.28 per cent. Yields rise when prices fall.
Read more: Ireland and UK agree Brexit border deal