UK agrees Brexit transition deal with EU, loose threads remain

Britain and the European Union have agreed a 21-month Brexit transition deal to smooth the break-up after March 2019, though the Irish border remains one of several issues not yet resolved and it was described by some as "not a decisive breakthrough".

The two sides have agreed a draft legal text for a transition deal once Britain splits from the bloc in March 2019, with Britain continuing to operate under all single market rules and judgments from the European Court of Justice until the end of 2020, while having no further say in future EU decisions.

Brexit Secretary David Davis and chief EU negotiator Michel Barnier announced the agreement in Brussels on Monday morning. The UK will be able to sign trade deals during this time, EU nationals arriving in UK during the transition will get same rights as before, while the UK will be able to pick and choose aspects of EU foreign policy decisions during the transition.

Ireland remains an issue, likely due to the potential disruption to the Good Friday Agreement's stipulation that people and goods must move freely across the Northern Irish border. Barnier said a note has been published showing how this issue will be dealt with.

A joint committee will be formed to resolve further issues that arise, said Davis, adding annual fishing quotas have been agreed for 2019 and for 2020 the UK will negotiate quotas as an independent state.

The pound rose 0.94% to 1.4073 versus the dollar by 1224 GMT and was up 0.7% on the euro at 1.1428.

With respect to the Ireland issue, the draft document said the negotiators agree that the 'backstop' solution for the Northern Irish border should apply as part of the withdrawal agreement "unless and until another solution is found", and further agree "that the full set of issues related to avoiding a hard border covered in the draft reflect those that need to be addressed in any solution".

Economists at Oxford Economics described it as a "standstill transition deal", keeping the existing trading arrangements in place until end-2020.

"But while this is an important milestone, it is not a decisive breakthrough," they added. "The transition deal is part of the wider withdrawal agreement and this will fail unless there is agreement on a ‘backstop’ solution for the Irish border. There is no solution to this problem in sight, unless the UK drops one of its red lines."

Analysts at Rabobank said they saw a risk that "anxiety regarding Brexit trade talks will weigh on the outlook" for sterling for six-nine months. "That said we expect GBP to rally sharply on a 12-month view on anticipation that a last minute EU/UK trade deal will be announced. We see EUR/GBP in the 0.84 area on a 15 mth view."

Sterling dropped off from its intraday peaks as the session wore on, with City Index's Ken Odeluga saying this reflected "much ambivalence" around whether or not Britain will "effectively be painted into a corner by a combination of opposing political forces, deadline pressure and the sheer complexity of negotiations over Ireland".

Additionally, earlier gilt losses were trimmed, with yields returning 55 basis points of their biggest move since early-March, suggesting short-term sellers took profits.

Indeed, while Barnier described the accord as "decisive", Odeluga noted that he stressed it was not legally binding and would remain so, unless a complete treaty is ratified before the UK formally leaves the European Union at the end of March 2019.

"However, whilst referencing the prior formula about Ireland that Prime Minister Theresa May rejected earlier, the agreement now notes Britain has accepted the EU’s protocol on 'Ireland/Northern Ireland'. In other words, the agreement still rejects the original deal, but agrees that another form of the same deal will be acceptable for a full agreement... Essentially, prospects that an EU/UK customs union could be extended for 21 months beyond Brexit have taken a significant stride forward."

Odeluga also said it was conceivable that Theresa May could face fresh murmurs of cabinet disquiet after Eurosceptic colleagues had pointedly not rocked the boat in recent weeks.