Sterling seesaws on currency markets as the UK and EU reach new withdrawal agreement

The pound swung dramatically in currency markets on Thursday after the president of the European Commission, Jean-Claude Juncker, said Brussels had come to an agreement with Britain on a Brexit withdrawal agreement to be presented to EU leaders.

Sterling rallied on news of the deal, gaining 1 per cent and touching $1.2990 before dropping again as the scale of the remaining challenge became clear. It traded 0.3 per cent lower at $1.2797 at 4.12pm in London, after the Democratic Unionist Party confirmed it would not vote for UK Prime Minister Boris Johnson’s Brexit deal in Parliament, saying it was not “in Northern Ireland’s long-term interests”.

Han Tan, a market analyst at currency broker FXTM, said in a research note on Thursday that the currency’s rally towards the $1.30 level reflected “relief among investors that both sides were able to get a deal over the line in time for the EU summit”. But he also said “a sterner political test awaits within Westminster on Super Saturday, where previous iterations of the Brexit deal have been stonewalled”.

Since the Brexit referendum in 2016, sterling has been one of the main avenues for investors to express their views on the outcome of the UK’s split from the EU. The initial sharp fall in the British pound was followed by a period of significant weakness.

Brexit uncertainty continues to hold back investment in the UK, the world’s sixth largest economy, which is projected to grow 1.2 per cent this year from 1.4 per cent last year, according to the World Economic Outlook report released on Tuesday during the annual IMF World Bank meetings in Washington. Exports have weakened and the pound depreciated because of concern over a no-deal Brexit, the report said.

“The pain is over and we are finally here! Brexit is done,” Naeem Aslam, chief market analyst at UK-based TF Global Markets, said in a research note. “We are seeing a lot of enthusiasm in the market on the back of the news that Brexit deal is done,” he said. “Sterling’s three-month volatility is insane and the price of sterling is soaring against the dollar. We expect this move to continue to explode and go beyond the $1.35 mark against the dollar.”

Mr Tan warned, however, that the pound’s fortunes and whether the protracted Brexit saga can be resolved by October 31 still rest on this weekend.

“If this next attempt to get the Brexit deal passed by UK lawmakers fails yet again on Saturday, the pound is sure to unwind recent gains,” he said. “However, a request for yet another Brexit extension, if granted, may mitigate sterling’s fall at around the $1.22 mark against the US dollar.” Ipek Ozkardeskaya, a senior market analyst at London Capital Group, said in a research note earlier on Thursday that even if the UK and EU leaders came to an agreement among themselves, “there is only a slim chance for Boris Johnson to find sufficient support in Parliament to give it a green light”.

Immediately after the Brexit deal was done in Brussels, Mr Johnson tweeted that the two sides had struck a “great new deal” and urged UK lawmakers to ratify it in a special session on Saturday.