Sterling fell half a cent against the greenback as the breakthrough was confirmed in Brussels, from above $1.35 to $1.3465, though analysts said a US government shutdown being averted later supported dollar strength as Friday’s session continued.
The pound settled around €1.1470 – rising 0.3% against the single currency – reflecting some relief EU-wide after European Commission President Jean-Claude Juncker declared “sufficient progress” had been made in the first phase of Brexit talks to allow negotiations on future trade to begin later this month.
It was the development that had been expected earlier in the week – only to be foiled because of wrangles over the Irish border – and it was broadly welcomed by the UK’s business community as a positive step.
However, lobby groups said it now piled pressure on ministers to provide clarity on the post-divorce relationship.
Sterling’s reaction helped boost the value of dollar-earning firms when the FTSE 100 opened for business – the index rising only fractionally.
Market watchers suggested the pound/dollar movements reflected many investors “going long” on sterling and taking some money off the table.
Craig Erlam, senior market analyst at OANDA, said: “The response in the pound to the announcement may come as a surprise given just how significant today’s agreement is but it’s worth noting that this has been in the making over the last couple of weeks and it was in both sides’ interest to get this done today.
“Had the two sides failed to come to an agreement then the downside in the pound may well have been far greater.
“We’ve seen a rally in the pound over the last couple of weeks on the expectation of a deal being agreed so what we may be seeing is simply a case of buying the rumour and selling the fact.”
Sterling has been the big casualty, in value terms, since the UK voted to leave the EU in June last year.
It had been trading at $1.50 ahead of the shock result – falling below $1.20 in the months that followed.
Its weakness has been the core reason for the surge in inflation during 2017 as the cost of imported goods has risen and been passed on to businesses and consumers alike.
Wage increases failing to keep pace has damaged household spending power and prompted concerns about consumer debt.
For many businesses the cost pressures have been secondary to uncertainty over the UK’s future trading relationship with the EU.
The head of lobby group UK Finance told Sky News on Thursday how firms were nearing “the point of no return” in terms of firing the starting gun on their contingency plans – to avoid the possibility of a so-called cliff-edge Brexit.
The progress was warmly welcomed though the CBI aimed a dig at the UK’s approach, saying: “Discussions will continue to be tough, but today’s progress shows that careless talk of walking away can be replaced by confidence that the UK can get a good deal.
“Steely determination in the national interest must always come first.”
The TUC called on the Government to drop “self-defeating red lines” in leaving the single market and customs union, suggesting it bring in union expertise to aid future talks.
Stephen Martin, Director General of the Institute of Directors, said: “Businesses will be breathing a huge sigh of relief that the UK and European Commission have reached agreement on phase 1 issues, putting us in a good position going into the Council meeting next week.
“It doesn’t mean the hard work has all been done, far from it, but it does mean we are now very close to discussing transitional arrangements and our future trading relationship with the EU.
“The most pressing concern for UK companies has been their EU staff, who have urgently needed certainty about their future in this country.
“We have grounds to hope now that our members will be able to send their employees off for the Christmas break feeling more comfortable about their status here.”
His counterpart at the British Chambers of Commerce, Dr Adam Marshall, said: “Business will particularly cheer the mutual commitment to a transition period to support business confidence and trade, and will want the details confirmed swiftly in the new year when negotiators move on to the big questions around our future trade relationship with the EU.”
He added: “Businesses want answers on what leaving the EU will mean for regulation, customs, hiring, standards, tariffs and taxes.
“The job of the UK government and the European Commission now is to provide those answers and do everything in their power to ensure vibrant cross-border trade between the UK and EU countries can continue.”
The pound has fallen against the dollar but struck six-month highs versus the euro following progress in the UK’s effort to begin post-Brexit trade talks.