FILE PHOTO - British Pound Sterling banknotes are seen in a box at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017.REUTERS/Leonhard Foeger

LONDON (Reuters) - Sterling surged on Monday after the European Union said it had agreed to grant London a status-quo transition after it exits the bloc next year, until the end of 2020.

Michel Barnier, the EU’s chief negotiator, said the EU and Britain had agreed a transition deal and had also agreed that a backstop solution on border arrangements for Ireland must be part of a legal text of the Brexit treaty.

The pound, already up against the dollar and euro, as expectations of the deal rose, gained further after the announcement. Against the dollar, it rose as much as 1 percent to $1.4088, its strongest since Feb. 16 and the biggest one-day rise since January.

Versus the euro, sterling rose 0.8 percent to 87.46 pence per euro, its strongest since Feb. 8.

British government bond prices fell and the yield on the two-year gilt - which is most sensitive to Bank of England interest rate decisions - hit a new high since the June 2016 referendum at 0.863 percent.

A transition Brexit deal has been widely seen as paving the way for a BoE rate hike in May.

Yields on safe-haven euro zone bonds too rose after the announcement, with Germany’s benchmark 10-year bond yield up 2 basis points at 0.59 percent - a session high.