The pound and UK stocks leapt higher on Tuesday afternoon, following reports the UK and EU are close to a Brexit deal breakthrough.
Bloomberg reported on Tuesday that both side were close to agreeing a draft text of a Brexit withdrawal deal. The Guardian followed with a similar report, saying the two sides have agreed to a border down the Irish Sea and a draft deal could be published as soon as Wednesday.
Sterling was up 0.9% against the dollar to $1.2752 (GBPUSD=X) at 4.20pm UK time, its highest level since late June. The pound was up 0.7% against the euro to €1.154 (GBPEUR=X), its highest since mid-May.
UK stocks also surged on the reports. Shares in Royal Bank of Scotland (RBS.L) were up 5.9% shortly after the reports (RBS.L), while Lloyds (LLOY.L) shares were up 5.9%, and Barclays (BARC.L) stock rose by 4.8%. Shares in British Gas-owner Centrica (CNA.L) spiked up 4.8% and house builder Barratt Developments enjoyed gains of 6.6% (BDEV.L). Other stocks with significant exposure to the UK economy also saw strong gains.
However, Irish premier Leo Varadkar told reporters on Tuesday afternoon that there was still a “significant” gap between the two sides in Brexit negotiations.
“The initial indications (from the EU) are that we are making progress, negotiations are moving in the right direction,” he said.
“But whether we will be able to conclude a revised Withdrawal Agreement, which is an international treaty, in time for the summit, that’s as of now unclear.” Varadkar said there were “a few hurdles between now and then.”
The pound had been performing strongly all day, following the EU’s chief Brexit negotiator Michel Barnier earlier comment that a deal was “still possible this week.” Brexit secretary Steve Barclay is also in Luxembourg, where he will be present at a gathering of EU ministers.
The current spell of optimism was mainly stoked by the outcome of last Thursday’s meeting between Irish prime minister Leo Varadkar and Johnson, after which both leaders said they saw “a pathway to a possible deal.”
Finnish prime minister Antti Rinne cautioned on Monday night that there was “no time in a practical or legal way to find an agreement” before Thursday’s meeting of EU leaders. “We need more time,” he said.
Meanwhile, Irish foreign minister Simon Coveney said on Monday that it “was too early to say” whether a breakthrough was possible this week. Raising the prospect of an emergency Brexit summit, Coveney noted that it might be necessary to move discussions to next week.
Neil Wilson, chief market analyst at Markets.com, said in an email that the pound to reach as high as $1.31 if a draft deal is confirmed.
“However, as we consistently stress, there is yet a lot to overcome even if a deal is agreed – most importantly parliament would need to back the agreement and this is far from assured,” Wilson wrote.