Pound hit three-month high against euro on prospect of 'soft Brexit'

The pound climbed sharply on Thursday after the Brexit Secretary David Davis said the UK might pay to retain access to the single market.

Sterling rose a cent to a three-month high of €1.19 against the euro and surged by two cents against the US dollar to just under $1.27, before slipping back to $1.26 later in the afternoon.

The UK currency has been trading at 31-year lows versus the dollar since the EU referendum, plunging to as low as $1.14 during a "flash crash" last month.

Its latest recovery still leaves it well below its pre-referendum level of $1.50.

The pound was buoyed by comments in the House of Commons by Mr Davis, the pro-Leave minister in charge of the EU divorce process.

Neil Wilson, senior market analyst at ETX Capital, said: "Sterling is on the tear on hopes for a soft Brexit.

"David Davis said the UK could contribute to the EU budget in return for access to markets and that has fuelled a rally for the pound.

"Meanwhile the pound has reached its best level against the euro since September as the clouds of uncertainty over Italy's referendum weighs on the single currency.

"We could get a further fall in the euro if Italy votes No on Sunday."

A stronger pound means cheaper imports and a better deal for UK holidaymakers abroad.

But a weaker UK currency can help manufacturers as their goods will be cheaper for overseas buyers - though it may also push up their costs.

The surge in the pound weighed on the FTSE 100, with the index down as much as 90 points. It recovered slightly to close 30 points down at 6752.

Global companies listed in London earn much of their revenues in foreign currencies. The sterling value of this income is lower when the pound is stronger.

Oil giants BP and Shell (LSE: RDSB.L - news) bucked the trend with gains of 2% as markets continued to digest the impact of OPEC's first deal to cut oil production for eight years. Brent crude rose 4% to $54.53 a barrel.

This was its highest level since July 2015.

:: OPEC agree to cut oil production - but will it make a difference?

It had already climbed 9% on Wednesday.

In New York, the Dow Jones opened strongly as oil firms ExxonMobil and Chevron (Euronext: CHTEX.NX - news) rose.