Brexit deal news lifts pound towards $1.30, fuels rally UK domestic-focused shares

By Olga Cotaga and Thyagaraju Adinarayan

LONDON (Reuters) - Sterling surged more than 1% and British share prices rallied on Thursday after British Prime Minister Boris Johnson and European Union officials said a Brexit deal was done.

European Commission President Jean-Claude Juncker said Britain and the EU had agreed a new Brexit deal, and he recommended that the EU summit endorse it. Both sides had found a "legally operative solution" to avoid a hard border in Ireland, EU negotiator Michel Barnier told reporters.

Some of the gains fizzled after the Northern Irish Democratic Unionist Party (DUP) Johnson relies on in parliament said there had been no change in their position, having earlier expressed concern the deal could cut Northern Ireland off from Britain in customs and regulatory terms.

The deal also will be subject to a vote by the British parliament.

However the currency and most British assets were celebrating the apparent breakthrough, with sterling on track for its biggest six-day rise since October 1985 <GBP=>, with a gain of 6%

It jumped as high as $1.2988 <GBP=D3>, a five-month high. Against the euro it rose sharply to 85.77 pence <EURGBP=D3>. It's been on a rollercoaster ride of late, up 8% since early September when it hit the lowest since October 2016 at $1.19.

"It looks like we've got something that would be the basis for a vote," said Kit Juckes, macro strategist at Societe Generale. "Now we will try to scramble up if he (Johnson) has got enough votes to pass the deal through the parliament."

"This could get through," he said, adding further gains were likely if traders rushed to offload short positions against the currency.

The euro was also buoyed by the news, rising to a seven-week high of $1.1140 <EUR=EBS> while the dollar index pulled back 0.3% <.DXY>

British government bond yields surged, with 10-year yields rising to 0.793%, their highest since July <GB10YT=RR>.

For a graphic on Sterling rallies, gilt yields rise, click https://fingfx.thomsonreuters.com/gfx/mkt/12/7503/7434/gbp.png

STOCKS AND RATE CUTS

The news also sent British and European stocks higher across the board, with the UK mid-cap index up as much as 1.1% <.FTMC>. Germany's DAX <.GDAX> rallied 0.5% while Ireland's <.ISEQ> gained 0.3%.

JPMorgan's basket of London-listed companies <.JPDEUKDM> that make their cash at home soared as much as 2.2%, extending its meteoric rally of the past week.

In this period it has vastly outperformed the FTSE 100 and FTSE 250 <.FTMC>. The benchmark is considered a barometer of Brexit worries, with half its stocks making their money in the domestic market.

"While Parliament approval is still required, the news today should provide legs to the rotation from UK exporters to domestic plays," Barclays Capital European equities strategist Emmanuel Cau.

For a graphic on UK Plc's domestic vs exporter stocks, click https://fingfx.thomsonreuters.com/gfx/mkt/12/7508/7439/jpm.png

However, optimism that a Brexit deal would be finalised saw money markets reduce expectations of rate cuts from the Bank of England. They now see a 60% chance of a quarter point cut next December versus 76% on Tuesday and 90% last week <BOEWATCH>.

Euro zone money markets too priced out chances of a year-end rate cut <ECBWATCH>

Investor uncertainty remains high however, options markets indicated, with the British Parliament scheduled to sit on Saturday and debate the outcome of the summit.

"Unfortunately, it is too early, I wouldn't be taking any direction at this point. It doesn't make sense to be taking steps either way on sterling at this point," said Michael Bell, global market strategist at JPMorgan.

(Additional reporting by Saikat Chatterjee, Tommy Wilkes, Josephine Mason, Joice Alves and Yoruk Bahceli; editing by Sujata Rao, William Maclean)