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Update: Pound rally fades as Brexit deal speculation proves premature


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Update: Pound rally fades as Brexit deal speculation proves premature

The pound reversed earlier gains as a mooted, and controversial, deal between U.K. and European Union negotiators on the Irish border issue failed to materialize.

Having risen nearly 0.5% against the dollar earlier in the day on U.K. media reports of a deal ensuring regulatory "alignment" with the EU on both sides of the border between Northern Ireland and its southern neighbor, sterling erased those gains and was flat on the day at $1.345 by 4.15 p.m. in London.

The FTSE 100 index was still 0.5% up on a good day for global stock markets, fueled by a big step forward in the passage of tax reform legislation in the U.S.

The sterling retreat accelerated after U.K. Prime Minister Theresa May and European Commission President Jean-Claude Juncker revealed at a joint conference that no final deal had been agreed, though both said much progress had been made.

"This is not a failure," said Juncker, adding that he was "confident we can reach sufficient progress" by the European Council summit on Dec. 14.

He was referring to the condition set by the EU at the beginning of the negotiation process that enough progress had to be made on divorce terms before talks move to a future trade deal, which the U.K. government wants to begin at that summit.

U.K. stocks and the pound jumped earlier in the day on reports of a breakthrough on the Ireland issue, which has been a key roadblock in the Brexit negotiations so far.

Donald Tusk, who will chair the upcoming summit, said on Twitter that he was "encouraged" by a phone call with Irish Prime Minister Leo Varadkar and that the talks were "getting closer to sufficient progress."

The impact of the move on the domestic debate around Brexit in the U.K., however, may be more complicated.

As reported, the deal would in practice have committed the U.K. to maintaining the principles of the both the EU's Single Market and Customs Union, which Prime Minister May has categorically ruled out as an approach for the rest of the country. Nicola Sturgeon, first minister of Scotland and leader of the Scottish National Party, which campaigned to remain in the EU, was quick to latch onto the reports, tweeting that if Northern Ireland can retain regulatory alignment with the EU then so can other parts of the U.K.

Arlene Foster, leader of the Democratic Unionist Party in Northern Ireland, whose support is necessary for the minority Conservative government to be able to pass legislation, responded to the "speculation" by claiming that any deal done between London and Dublin had been reached without consulting them.

"The Irish government is clearly seeking to unilaterally change the Belfast Agreement," she said. "We will not stand for that. We will not accept any form of regulatory divergence which separates Northern Ireland politically or economically from the rest of the U.K."