4 Nov 2016

Brexit-curbing court ruling bolsters British Pound

8:57 am on 4 November 2016

The British Pound has surged to a four-week high after England's High Court ruled the government needed parliamentary approval to trigger Brexit, and the Bank of England scrapped plans to cut interest rates.

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Photo: 123RF

The court ruling offered hope to markets worried that Prime Minister Theresa May's cabinet is set on an economically disruptive "hard Brexit", with investors reckoning lawmakers - a majority of whom supported staying in the EU in June's referendum - would push for Britain to keep access to Europe's single market.

The government said it would appeal the judgment at a Supreme Court hearing set for early December. But Deutsche Bank told clients that even if it won its appeal, lawmakers had been emboldened, and its base case scenario was therefore now for Britain to hold a parliamentary election next year.

The British pound climbed as much as 1.5 percent to hit $US1.2494, its strongest since 7 October - the day a "flash crash" briefly sent it plunging 10 percent in a matter of minutes.

Against the Euro, the pound rose 1.9 percent to hit a four-week high of £0.88595.

By 4.30pm GMT it had eased back to $1.2440, but that still left it over 1 percent up on the day and on track for its best week in eight months after a more than 2 percent climb.

"While the ruling may be reversed when appealed at the start of December, the decision does offer hope to 'remainers'," said Oanda market analyst Craig Erlam.

"In the best-case scenario, it won't pass through parliament and the Brexit referendum will have been for nothing. [That] is still unlikely at this stage as the political backlash could be extreme but still, this ruling does offer hope and this is why we've seen Sterling spike."

Other analysts said the impact of the court decision would be more limited, and many said lawmakers were unlikely to block the formal invocation of Article 50 of the EU constitution, which triggers exit negotiations.

Japanese bank Nomura last week laid out research that showed that while 74 percent of members of parliament known to have a view supported remaining in the EU before the referendum, 61 percent of their constituencies voted in favour of leaving.

"It's hard to ignore that 51.9 percent of the country voted to leave the EU," they said.

"It's even harder when you are an MP who at some point will stand for re-election, especially knowing that 61 percent of the parliamentary constituencies ... voted to leave."

The Bank of England had also cut rates to a record low of 0.25 percent in August and in its latest quarterly inflation report it said chances of a rate hike had risen.

It said it would cut again to deal with the economic fallout of the Brexit vote, but the pound's plunge since then sent inflation expectations soaring.

Bank of Tokyo-Mitsubishi in London analyst Lee Hardman said it certainly looked like Bank of England policymakers were becoming more concerned about the effect of the currency's weakness on inflation.

"They have even signalled that they could raise rates even if that is not the core scenario. Relative to the previous meetings, the change is really noticeable. I was expecting them to place more emphasis on the weaker medium-term outlook."

Shares in European banks - another big source of concern in the Brexit process - gained 1.1 percent, while UK midcaps, more geared to the domestic economy than their bluechip peers, jumped 0.7 percent, significantly outperforming the more globally-focused FTSE 100.

The daily spread between the two indexes briefly hit its highest since 2009.

Several traders also said the pound's bounce looked like a short-term correction to the falls since the referendum vote in June, which have knocked almost 20 percent off its value.

- Reuters

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