The pound had its best day on the currency markets for almost two decades as the City reacted positively to Theresa May’s speech.
Most of the improvement came as a recovery from sharp falls in sterling earlier in the week, when the prime minister’s tough stance on Brexit had caused some dismay.
Markets typically see-saw between extreme pessimism and over-optimism with no rational basis for either. A hard Brexit was regarded as damaging to the economy because it would make business less competitive by shutting off access to continental markets and pushing up inflation, so giving consumers less money to spend.
Dealers latched on to two positives from the speech. They thought that the promise to put any eventual deal before parliament suggested that the eventual Brexit would be less hard than feared, while indications that transitional arrangements might be put in place to ease Britain’s passage out of Europe could mean the eventual disruption would be less severe than feared.
One of the biggest surges in the pound came, therefore, when Mrs May announced the parliamentary vote.
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Sterling was up about 1 per cent against the dollar even before Mrs May began to speak, on the back of higher-than-expected inflation figures which suggested that interest rates might start to rise sooner rather than later.
The pound ended the afternoon’s trading almost 3 per cent higher against the dollar at $1.2375 and almost 2 per cent up on the euro at €1.1556. Chris Saint, senior analyst at the stockbrokers Hargreaves Lansdown, said: “I think the market was reacting to the worst-case scenario not coming to fruition. There’s still a lot of uncertainty.
“This is a big bump up on the day from what were quite low levels, even though not much has changed.”
The rise was the biggest recognised in official data since it began to be compiled in 1998.
After passages from the speech were released on Sunday night the pound fell on Asian markets to below $1.20, a psychologically significant barrier and its lowest point since October.
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Analysts cautioned against reading too much into yesterday’s rally. The pound can expect a difficult ride as Brexit nears and more details become known, and further collapses are likely on developments regarded as negative by the markets.
Nicholas Brooks, chief economic commentator at Intermediate Capital Group, a specialist City finance company, said: “Until there is more clarity on what a final deal will look like, the pound will remain hostage to Brexit negotiation terms.”
There is also the continuing uncertainty over the effect on the economy. A weaker pound forces up inflation because imported goods become more expensive, taking money out of people’s pockets for spending elsewhere. Higher inflation also tends to push up interest rates, adding to mortage and loan costs.
Kallum Pickering, senior UK economist at Berenberg, the stockbroker, said: “Besides offering a round-up of May and her Conservative government’s broad ambitions for Brexit, most of which had been leaked or announced much earlier, we learnt nothing new today that adds any colour to our economic outlook for Brexit.”
Philip Shaw, economist at the stockbroker Investec, said: “It was as much the prime minister’s conciliatory tone as well as the content of her speech that supported the pound.”
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The other uncertainty is how business will react to being shut out of the single market. Mr Brooks added: “Uncertainty will remain high and companies with UK operations that substantially rely on the EU . . . will likely start considering contingency plans.”