The pound has rallied overnight following news of a Brexit deal being reached between the UK Prime Minister Boris Johnson and European Commission president Jean-Claude Juncker.
The deal caused sterling to rise to $1.29 for the first time since May, but there were muted gains on the UK stockmarket with the FTSE 100 rising 0.2%.
While the agreement is a milestone in Brexit discussions, there would still need to be support from the Democratic Unionist Party (DUP) in Northern Ireland which was critical for the deal to pass through the House of Commons.
The DUP was likely to reject the deal as it objects to Johnson’s idea of custom checks at the point of entry into Northern Ireland. Northern Ireland would also have different VAT rates to the rest of the UK, possibly the same as in the Republic of Ireland which would remain part of the European Union (EU.
Other factors in the deal included the UK abiding by EU rules until the end of 2020, an estimated £33bn ‘divorce bill’, guaranteed rights for EU citizens living in the UK and vice versa and a removal of the controversial ‘Irish backstop’ which would have kept the UK in a customs union with the EU.
Howard Cunningham, fixed income portfolio manager at Newton Investment Management, said: “In the event of a deal there is further upside for sterling (c5%) but downside for gilts (albeit limited due to the weaker global economic backdrop and low bond yields elsewhere).
“In the unlikely event of an abrupt no deal Brexit on 31st October, sterling downside is greater, while gilt yields would fall, at least initially, but longer-term threats to their safe-haven status would surface. If nothing is resolved this month, and an extension granted for a referendum or general election, gilts and sterling will remain stuck in no man’s land, given the outcome of either is very unpredictable”
Nigel Green, chief executive of the deVere Group, said: “If this deal is ratified, we can expect the pound to jump sharply. It is likely to hit at least $1.35 as the prospect of a no-deal, and/or months of further uncertainty ends.
“Sentiment towards UK stocks will also rally, particularly given the attractive valuations of many UK companies.
“However a strong pound may dilute the impact on exporters, as their earnings in dollars and euros, amongst others, will become less valuable in sterling terms.”