Sterling gains after EU's Barnier says Brexit deal 90 pct done

LONDON (Reuters) - The pound rose on Friday after EU Brexit negotiator Michel Barnier said a deal with the United Kingdom was 90 percent done, although undercurrents of uncertainty in Britain kept the gains in check.

FILE PHOTO: British Pound Sterling banknotes are seen at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/File Photo

More positive noises out of Brussels about reaching a Brexit agreement - the dominant driver of sterling - have been offset by growing unease within Prime Minister Theresa May’s Conservative party about the sort of deal she is hoping to forge.

“A domestic political storm may well be about to hit London. The latest move to extend the (Brexit) transition period beyond December 2020 looks to have really destabilised the domestic political landscape,” said MUFG analysts in a note.

“A break below $1.3000 in GBP/USD looks inevitable now.”

Sterling rose immediately after Barnier’s comments, before extending to as high as $1.3061 in late European trading.

It rose as much as 0.2 percent against the euro at 87.785 pence before settling at 87.995 pence.

Data showing Britain’s government recorded a smaller budget deficit than expected in September also provided some support to the currency.

On Thursday, May and other EU leaders voiced renewed confidence that they could secure a Brexit deal, yet the two sides remain at odds over how to deal with their only land border, between the British province of Northern Ireland and Ireland.

Barnier said on Friday that failure to resolve that issue could still derail any deal.

Britain’s foreign minister Jeremy Hunt said on Friday it would be hard to resolve the issue of a backstop to the Irish border problem in Brexit talks with the EU without more detail on their future relationship.

In a note to clients on Friday, RBC analysts said there had been no improvement in Britain’s export performance despite sterling tumbling and remaining weak since the British voted to leave the EU in 2016.

“Unless domestic demand surprises to the upside, which seems unlikely, we still see downside export surprises as a key vulnerability for UK rates and GBP,” they said.

Reporting by Tom Finn and Tommy Wilkes; Editing by Matthew Mpoke Bigg and John Stonestreet