New Northern Ireland deal sends sterling higher

By Joice Alves and Bansari Mayur Kamdar

LONDON (Reuters) -Sterling rose on Monday, and was set for its biggest daily gain against the dollar in six weeks, after British Prime Minister Rishi Sunak announced a deal with the European Union to amend the original Northern Ireland Protocol.

Betting that the reward of better terms with the EU is worth the discord it might cause within his own party, Sunak also said Britain's parliament would get a vote on the new agreement.

The deal is aimed at solving tensions caused by 2020 post-Brexit arrangements governing the British province and its open border with EU member Ireland.

Sterling rose 0.76% against the U.S. dollar to $1.2030, after slipping to an almost two month low against the greenback in earlier trading. It is still set for its first monthly decline against the dollar since September.

The pound edged 0.2% higher versus the euro to 88.12 pence.

"We are not seeing any dramatic market movements right now... But it does take away the prospect of a very nasty tail risk for UK assets. Bad news averted is good news, I’d say," Stefan Koopman, senior market economist at Rabobank, said.

"Even some of the more die-hard Brexiteers have stopped talking about all the opportunities that Brexit was supposed to bring. So we are now in the phase of damage limitation. That is – relatively speaking – a positive factor for sterling and UK assets going forward," he added.

FOCUS ON RATES

Currency strategists said the focus remained on monetary policy, with the latest data showing a surprise return to growth by British businesses in February raising the likelihood of more interest rate hikes.

Money markets are pricing in a 97% chance of a 25 basis point (bps) Bank of England (BoE) hike in March, with rates seen peaking in August at 4.75%, from 4.00% now.

They are also pricing in a 56% chance of a 50 bps European Central Bank (ECB) rate increase in March and a 43% chance of a 75 bps move. [IRPR]

As the ECB could increase rates more than the BoE, the euro could find support against sterling. On the other hand, a strengthening dollar could send sterling to $1.1850 this week, ING said in a note.

(Reporting by Joice Alves in London and Bansari Mayur Kamdar in Bangalore; Editing by Mark Potter and Christina Fincher)