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Sterling falls from 5-month high as DUP rejects Johnson Brexit deal

The pound reversed gains after hitting a five-month high against the dollar as traders weighed whether Prime Minister Boris Johnson would get his Brexit deal through Parliament without the support of Northern Irish unionists, the DUP.

Sterling rose as much as 1.2% to $1.2988, the highest level since May 14, before erasing its gains to trade 0.3% lower at $1.2792 as of 1:37 pm in London. It closed at $1.2034 on Aug. 9, the lowest level since 1985, as the chances of a deal appeared to wane.

Johnson announced today that the U.K. and the European Union agreed to a deal on the terms of the U.K.'s withdrawal from EU, setting the stage for a crunch parliamentary vote this Saturday, Oct. 19.

Parliament will convene on Saturday to vote on the deal in what will be the second attempt by a U.K. prime minister to ratify a Brexit deal agreed upon with the European Union. Parliament voted down a deal agreed to by Theresa May three times between January and March 2019, which resulted in May's replacement by Johnson in July.

If Parliament does not vote Johnson's deal through, the pound would give up its recent gains, Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets, said in an interview. Sterling has surged almost 5% since Oct. 9 as the likelihood of a deal increased. It was trading at $1.47 ahead of the June 24, 2016, Brexit referendum.

The British pound could return to $1.40 if the deal passes Oct. 19 during a rare weekend session of Parliament, said Stretch. "We're now in a scenario where we're thinking, what is the probability of any deal being agreed by Parliament? That's going to be the defining factor."

The inclusion of the controversial "backstop" solution to the customs relationship on the Irish border was the killer blow for May's deal, losing her the support of unionist Northern Irish party, the DUP, as well as hardline Conservative MPs.

Johnson also appears to be pressing ahead without the support of the DUP, whose leader Arlene Foster stated that the party cannot support the suggested customs and consent legislation.

However, having increasingly flirted with a no-deal scenario, some 'remain'-minded MPs may support the deal, and Johnson appears to have more backing from the rebellious right wing of the Conservative party than Theresa May did.

"There's been a good appetite to hold sterling, so a lot of people have been keen to close out those short positions and there's been a lot of short covering throughout the process. But there has also been some buying interest starting to come back in," Stretch said.