Sterling rallies as UK-EU reach agreement

Sterling has rallied after the UK and the EU agreed legally binding changes relating to the Withdrawal Agreement, and the backstop in particular. It strengthened to a high of about 84.80p against the single currency overnight (though it’s a bit lower now), and has rised to over $1.32 against the dollar. The single currency is  slightly firmer against the dollar too on the news, at about $1.1270 currently. UK bond yields are a touch higher this morning, by about 5bps in the case of 10-year yields

The main question now is whether the changes agreed are enough to persuade the UK parliament to  pass the Brexit deal when it’s put to a vote tonight. This in turn will depend largely on the position of the DUP and the Tory “Hard Brexiteers”, which in turn may hinge on the advice of the UK Attorney General which he will provide prior to the vote (he previously concluded that the backstop could “endure indefinitely”, which was anathema to many in parliament)

If the deal does pass in parliament, it would mean a transition period kicking in lasting until at least until the end of 2020, during which current EU-UK trading arrangements (i.e. the status quo) would apply. This would be positive for the UK economy, providing a boost to activity, and would probably prompt the Bank of England to nudge up interest rates as well, both of which would be also positive for sterling

If the deal is again defeated, then based on the current schedule, tomorrow parliament will vote on leaving the EU without a deal, and assuming it rejects a no deal departure, on Thursday parliament will vote on extending Article 50. Assuming it votes to extend, this may be neutral for sterling as the market awaits the next steps

Data due today includes UK GDP and US CPI