The pound rose to a four-month high against the dollar on Tuesday amid reports that Brexit could be delayed.
The pound was buoyed by reports that prime minister Theresa May could delay Britain’s 29 March exit from the EU. May is expected to propose formally ruling out a no-deal Brexit to her Cabinet, according to The Sun.
May could postpone Brexit by weeks or months if parliament does not back her deal. Parliament has been deadlocked over Brexit after MPs rejected May’s EU withdrawal agreement in January. The next vote on the deal is due to take place on 12 March.
The pound was also lifted by news that Labour is backing a second referendum on Britain’s membership of the EU in the wake of several MPs quitting the party.
Michael Brown, a senior analyst at payments firm Caxton FX, said: “The pound’s gains are a result of markets beginning to price in an extension to the Article 50 negotiating period, with reports this morning that the prime minister is set to discuss the matter with Cabinet before laying a motion in the (House of) Commons this afternoon.
“Though a delay is simply pushing back the exit date, and doesn’t solve anything itself, markets are taking solace in the fact that such a move would delay a ‘cliff-edge’ no-deal scenario.”
Brown said a confirmation of the delay would likely strengthen the pound further in the near-term, but noted that political headwinds remain, such as a possible second referendum.
Ken Odeluga, a market analyst with City Index, said: “The market is becoming convinced that a softer-Brexit is on firmer ground.
“Still, with cable up more than a percentage point in less than two days and sterling stronger against the euro than at any time since last April, the key risk for markets is an overestimation of remaining momentum and perhaps an underestimation of remaining risks to the upside.
“A delayed Brexit does not equal a cancelled Brexit after all. Clues from options trades around 29th March remain ambivalent at best, a sign that the possibility of market mayhem from some sort of political upset has yet to be priced out.”
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.