Sterling briefly boosted by hopes EU will offer UK-wide customs union

LONDON (Reuters) - Sterling briefly gained half a percent against the dollar and euro on Tuesday after a media report that the European Union could offer British Prime Minister Theresa May a UK-wide customs union to clinch a Brexit deal.

A shop cash register is seen with both Sterling and Euro currency in the till at the border town of Pettigo, Ireland October 14, 2016. REUTERS/Clodagh Kilcoyne

The report by Ireland’s RTE News followed a Reuters story on Monday that EU negotiators were looking at ways to promise Britain a customs deal.

The pound’s strength was only brief, however, and weakness in late European trading reflected that the market remains unconvinced May can successfully sell any deal to her Conservative party colleagues and get it through parliament.

EU diplomats have told Reuters that the bloc is examining ways to solve the Irish border problem by keeping the whole of the United Kingdom, and not just Northern Ireland, inside the EU’s customs territory.

This would be fully settled only in post-Brexit negotiations – and the EU would set stricter terms than May offered. The EU also still wants some element of special protection for Northern Ireland in the treaty, although it may be only hypothetical.

“It’s more of the positive news that things are progressing in terms of the Irish border issue,” said ING analyst Viraj Patel, while adding some caution. “Until the market sees a politically viable Brexit deal, sterling is not really going to hold to short term spikes or gains.”

The pound rose from below $1.30 to as high as $1.3044 after the RTE report, up 0.6 percent on the day, before giving up most of the gains to trade at $1.2984 at 1435 GMT.

It also jumped versus the euro to as much as 87.995 pence before easing back to 88.225 pence.

May’s spokesman said on Tuesday that the British leader was confident she could get a Brexit deal that will win the support of parliament.

The prime minister had told parliament on Monday that the Brexit deal with Brussels was 95 percent complete, and she urged restive lawmakers to back her in the final stages of Britain’s exit from the EU, saying talks were in their most difficult phase.

But opponents within her own party and in the opposition have stepped up criticism of the deal she is trying to get, even if an imminent challenge to May’s leadership appears less likely.

“The problem is simply that May’s critics talk a tough game, but when push comes to shove, they fold because it is not clear that any challenger can muster the necessary votes to replace May,” said Marc C. Chandler, chief market strategist at Bannockburn Global Forex.

Reporting by Tommy Wilkes; Additional reporting by Alasdair Macdonald in Brussels; Editing by Alison Williams