Sterling surges on signs EU, Britain ready for compromise on Brexit proposals

LONDON (Reuters) - Sterling rallied on Thursday as investors bet Britain and the European Union were moving closer to an agreed position on a deal for Brexit and a way to avoid extensive border checks in Ireland.

The pound hit a 2-1/2-month high versus the euro and rose above $1.30 against the dollar.

Most of the gains came after a European Union source told Reuters new British proposals for avoiding extensive border checks in Ireland after Brexit were “a step in the right direction” and “make finding a compromise possible”.

That followed other signs this week that London is making progress towards a Brexit agreement before Britain quits the EU in March.

Britain is trying to overcome one of the thorniest issues in the Brexit negotiations: a “backstop” deal to protect an open border between Northern Ireland, part of the United Kingdom, and EU member Ireland, should the UK leave the EU without an overall exit agreement.

The Financial Times reported that Ireland backed one of UK Prime Minister Theresa May’s proposals - for the whole of the UK to operate within a customs union with the EU - if no other solution to the Irish border issue was found.

MUFG analysts said that rather than weaken as feared during this week’s conference of May’s ruling Conservative Party, sterling had been given a boost by the Irish reports.

“The EU would have to provide some encouragement as well that it is warming to the idea for the pound to stage a rally in the coming weeks,” they said.

May’s conference speech on Wednesday lacked anything new to shift market sentiment and had little impact on the pound.

After falling as low as $1.2922 overnight - its weakest since Sept. 10 - sterling rallied to as high as $1.3041, up 0.8 percent on the day.

Versus the euro the pound rose 0.4 percent at 88.40 pence, its strongest since July 16.

In her speech, May appealed to her party to unite behind her plan to leave the EU, warning critics their disputes could put Brexit in jeopardy.

May’s officials plan to rush her Brexit deal through Parliament to stave off a rebellion from her own party, Bloomberg reported on Thursday.

There also appears to be a considerable way to go before London and Brussels can agree a deal. European Council President Donald Tusk on Thursday sharply criticised what he called “emotional” and “insulting” statements about the EU by British ministers and urged London on Thursday to accept an offer of very close post-Brexit ties.

“Somehow, everything seems to be rather deadlocked at the moment, and as a result the downside risks for sterling remain in place,” Commerzbank analysts said in a note to clients.

The pound is likely to be stronger by the time Britain leaves the EU, according to currency strategists polled by Reuters, but in a year it still won’t have recouped its losses since the 2016 Brexit vote.

Reporting by Tommy Wilkes; editing by Toby Chopra, Larry King and Adrian Croft