By Eamon Quinn and Geoff Percival
A surge in sterling as EU and UK negotiators reached a breakthrough in the Brexit talks could be shortlived, analysts have warned, as many political obstacles to closing the deal lie ahead.
The UK currency leaped 0.75% against the euro to 86.65 pence, ostensibly relieving pressure on many Irish SMEs exporting across the Irish Sea.
And there was some early evidence that a handful of Irish shares, including Bank of Ireland, could get an early boost in the coming days if the deal between EU Brexit chief Michel Barnier and the UK proves durable.
Irish shares which generate a significant part of their revenues in the UK have been among the most exposed after the slump in the value of sterling from 76 pence following the UK vote to leave the EU in June 2016.
But analysts warned that there could be tough tests ahead because UK Prime Minister Theresa May must now try and navigate the deal through her own cabinet and the UK parliament.
“I think sterling will get a little strength on the back of the report of a deal,” said Owen Callan, senior analyst at Investec Ireland.
“But the gains could be capped” because Ms May must now travel the “difficult path” of securing support from the DUP and the parliament, he said.
The “mood music” has improved but any predictions on the future direction of sterling will depend on getting through the political obstacles in the coming weeks, Mr Callan added.
Ever since the UK voted to leave the EU in the summer of 2016, sterling has played the role as a key financial barometer in measuring the progress and setbacks of the divorce talks between the EU and UK.
Sterling had traded as low as 91 pence in August amid fears that the UK was set to crash out of the EU in March next without a deal.
Irish food firms, in particular — who employ large amounts of people — could benefit if sterling were to rise sharply against the euro.
Merrion chief economist Alan McQuaid said any good news on Brexit will naturally translate to good news for Ireland, with the results likely to be evident in share prices Irish government bonds.
He said a positive Brexit outcome also would boost sterling and could see it trade as high as 80 pence.
However, Mr McQuaid said although some form of deal seems likely, the British government’s ability to get it endorsed by its parliament and gain the support of the DUP remain in the balance.
Fiona Cincotta, senior market analyst at City Index, said sterling surged on the Brexit breakthrough news.
“The pound has been on a wild ride so far this week. After heavy falls in the previous session, the pound was over 1.4% higher as it continues to oscillate to Brexit sentiment. Reports that there are just a few small outstanding issues to a Brexit deal was enough to send the pound back over $1.30 to a peak of $1.3020, almost 200 points up from Monday’s low,” she said.
“Talk of a conclusion to Brexit talks could be short-lived, with UK parliament looking increasingly unhappy with the direction of travel,” warned Joshua Mahony, market analyst at online broker IG.
“This could be just the beginning, for a convincing rejection from parliament or the EU nations could go a long way to highlighting exactly how far we are from any form of positive resolution,” he said.