As several sellside desks have summarized, today will be a binary one for GBP: either deal or no deal. And following an early swoon in cable after speculation rose that a deal would be elusive, the pound soared above 1.35 following a report that EU chief brexit negotiator Barnier told MEPs that a breakthrough is likely today. This was confirmed moments ago by the FT which said that "Britain is heading for a breakthrough on Brexit talks after reaching a compromise with Ireland on the border between the Republic and Northern Ireland, the issue that threatened to derail the negotiations."
The draft refers to maintaining “regulatory alignment” between Northern Ireland and the Republic after Brexit — a form of words that, according to a senior official involved in the talks, appears to meet Dublin’s deep concerns about a possible hard border on the island and has not raised objections in London. The wording is more comfortable for Britain than previous draft formulations that insisted on “no regulatory divergence”.
The BBC confirmed as much after its political editor Laure Kuenssberg said that “May and Juncker about to appear together - with a deal seeming to be on the table."
May and Juncker about to appear together - with a deal seeming to be on the table— Laura Kuenssberg (@bbclaurak) December 4, 2017
The Irish issue is critical because as Citi's trading desk explained, the sticking point in today’s crucial Brexit talks is likely to be Ireland/Northern Ireland. As the bank explained, the problem is obvious: With a difficult recent history, the Good Friday Agreement (GFA) and intense diplomacy on both sides has led to an open border for goods and people for years. Evidently, this open border policy is at odds with one of the major Brexit drivers – leaving the customs union and putting a halt to absolute freedom of movement within the EU. Northern Ireland is part of the United Kingdom – this is an extremely important political/ideological point – it is therefore impossible to have open borders between Ireland/Northern Ireland and not have open borders with the rest of the UK. That is the dilemma that the UK and the EU must find a solution to.
This situation is exacerbated by the fact that May’s razor thin majority is only held together with the support of the DUP (Democratic Unionist Party), who are the biggest pro-Union faction in Northern Ireland. They are fiercely protective of the integrity of Northern Ireland within the UK and will strongly resist any attempts to push North Ireland closer together with the South. They have the ability the pull the rug out from beneath May at any point.
Furthermore, EC president Donald Tusk said late last week that the EU would not agree any deal that Ireland did not support, in effect giving a veto over the talks to Leo Varadkar, Irish prime minister, who convened an emergency cabinet meeting on Brexit on Monday morning.
Now, however, this key hurdle appears to have been overcome, leading to optimism that progress toward a full Brexit will be consummated.
The alleged deal comes just minutes before Theresa May was set to enter a crucial lunch with Jean-Claude Juncker, where Ireland has remained the main obstacle to a deal on Brexit divorce terms.
The report sent cable surging, which earlier in the session had been trading lower over the aforementioned Brexit doubts. But the reported breakthrough pushed sterling 0.7% higher, to $1.3524, sending it into positive territory for the day.
As the FT adds, Britain and the EU have also made progress on the other two big divorce issues — the Brexit bill and citizen rights — as they seek to make sufficient in the talks to allow a second phase of negotiations — on a transition and a future EU-UK relationship to go ahead.
The compromise proposed by EU negotiators refers to the need for continued “alignment” with single market rules that support co-operation between Northern Ireland and the Republic, according to a person familiar with the text.
Mrs May’s position has been complicated by her reliance on the votes from Northern Ireland’s Democratic Unionist party for a parliamentary majority in Westminster.
Downing Street said that Mrs May would not agree to any Brexit deal that put barriers between Northern Ireland and the rest of the UK.
Still, it remains to be seen what shape this deal will take and what exactly it means – it still seems illogical that one part of the UK might be remaining within the customs area and free travel zone – there must be more to come. Either way, it is certain that May and her cabinet will have involved the DUP along the way – they cannot afford to lose their support. GBP has been creeping up on this news a little cautiously, having jumped on earlier optimistic headlines.
The bottom line, as Citi summarizes, is that "sufficient progress" looks to be in the bag now given the border deal and improved divorce offer. And now we await confirmation from Juncker and May.