Sterling Spikes As EU Touts 'Brexit Breakthrough'

Update (1030ET): Bloomberg reports, according to two people with knowledge of the negotiations, confirm the earlier rumors that the U.K. and EU are inching closer to a draft Brexit deal. Any deal will hinge on U.K. Prime Minister Boris Johnson getting the support of Northern Ireland’s Democratic Unionist Party.

As the headlines hit, Cable broke above the $1.27 level, the highest since since June 25.

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As we detailed earlier, what a difference a week can make.

One week ago, hopes for a last-minute Brexit withdrawal deal before the Oct. 31 deadline had reached a nadir after a reportedly contentious call between UK Prime Minister Boris Johnson and German Chancellor Angela Merkel. But a carefully orchestrated meeting with Johnson's Irish counterpart Leo Varadkar, seen as the EU27 leader most sympathetic to a modified deal proposed by Johnson, revived hopes for an agreement on Thursday, and though some doubts reemerged over the weekend, the general tone of comments made by top EU officials, including chief Brexit negotiator Michel Barnier, has been positive.

The latest bullish comments come courtesy of Barnier, who warned that, although the UK's proposal is complex and the EU is still trying to suss out all of the implications of Johnson's proposed alternative to the Irish backstop, the EU27's chief Brexit negotiator is optimistic that a deal will get done this week.

Barnier has requested that Johnson submit a revised plan to Brussels by midnight on Tuesday.

Following rumors that the British government wouldn't be able to meet Barnier's midnight deadline, Bloomberg reported that British negotiators have submitted a revised plan to Brussels Tuesday morning. Though it's slightly past Barnier's Tuesday-night deadline, Johnson and his team reportedly expect to have a draft legal text ready for diplomats to scrutinize by Wednesday.

Fortunately for Johnson - who lost a critical source of leverage, the prospect of the UK leaving without a deal, when Parliament passed the Benn Act last month last month, legally requiring him to request another Article 50 delay if Parliament hasn't passed a new deal, or voted in favor of 'no deal', by end of day on Oct. 19. - French President Emmanuel Macron reportedly expressed reservations about approving another extension of the Brexit deadline beyond a "technical" extension of a few days to finish hashing out the final deal.

Though Macron caved last time around, the notion that the EU27 might not be able to muster the unanimous support for another extension offers Johnson more leverage. Even better: Macron praised Johnson's new plan as a "serious" proposal.

Throughout the entire Brexit ordeal, most of the big sell-side banks have maintained that the most likely outcome is that a deal will ultimately be reached before the UK leaves the EU (or Brexit will be called off altogether).

On Tuesday, JP Morgan's credit strategists assured the bank's clients that they can pare back their no-deal Brexit protection. Meanwhile, Mark Carney offered some "insight" into how the events of the next three weeks might impact the pound.

As parliamentary support for Johnson's deal grows, analysts have noted the complexity of what Johnson is proposing to replace the hated Irish Backstop. Essentially, Johnson's plan allows for a new backstop where Northern Ireland will exist in two customs zones, the UK's and the EU's. Importers in Northern Ireland will initially pay the higher EU tariff rate, but if the goods ultimately end up staying in Northern Ireland and not crossing into the Republic of Ireland, importers will be able to apply for a rebate.

Whatever happens, the EU is hoping to have a deal in place so that both sides can iron out the last remaining details and stamp it with their seal of approval during an upcoming EU Council summit.