* Graphic: sterling and gilt yields bit.ly/2dgAXn1
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv
By Jemima Kelly
LONDON, Dec 8 (Reuters) - Sterling soared to a six-month high against the euro on Friday, on relief that Britain and the European Union had managed to strike a deal to move on to talks about post-Brexit trade and a transition period.
The European Commission said enough progress had been made after the two sides worked through the night to reach a deal over the status of the Irish border, which had scuppered an earlier attempt to clinch a deal on Monday.
Sterling strengthened to 86.90 pence per euro on the news, its strongest since June 9, before easing to 87.15 pence, up 0.3 percent on the day.
On a trade-weighted basis, the pound climbed to its strongest level since May. Against the Swiss franc , it has now recovered almost all the losses suffered since the vote for Brexit 18 months ago, trading at its strongest since June 24, 2016.
The Commission’s recommendation that sufficient progress has been made will now go to the European Union summit of leaders taking place next week.
Draft guidelines showed the transition period would last around two years. During that time, Britain will remain part of the customs union and single market but will no longer take part in EU institutions or have a vote. It will still be subject to EU law.
“If the UK and EU can quickly agree a transition deal of at least two years in the first quarter of 2018, then we will have three years until any major changes happen because of Brexit,” said Nomura currency strategist Jordan Rochester.
“This takes it beyond the scope of the market or MPC (Bank of England monetary policy committee) to really worry about. In other words, the key change next year is that the market’s sensitivity to Brexit negotiations should fall substantially – and stop weighing so much on UK yields and sterling.”
Sterling jumped to as high as $1.3521 on the news, then edged back to just below $1.35 as the dollar climbed across the board.
“We are optimistic that agreeing a transition deal will not prove difficult,” said MUFG currency strategist Lee Hardman.
“Both sets of negotiating principles released at the very beginning make clear what would be expected if a `status quo’ transition period is required. Our optimistic forecast for the pound going forward - above the $1.40 level in 2018 - is now more achievable after this important step today.” (Editing by Larry King)