The struggling pound sterling surged Wednesday after a brutal sell-off, as British Prime Minister Theresa May’s offer to give lawmakers some scrutiny of the process to leave the European Union calmed market fears of a “hard Brexit”.
Those fears – that Britain will give up full access to the EU’s single market in order to impose maximum control on its borders – pushed the currency to 31-year lows last week, including on Friday when it lost 10 percent.
May’s decision comes ahead of a court ruling on Thursday, which will decide if she can trigger Article 50 – the rule that initiates the process of separating Britain from the European Union – without the consent of parliament.
Many lawmakers seem to favor a “soft Brexit” or no Brexit at all and investors fear the “hard” option could hurt trade and foreign investment needed to fund Britain’s huge current account deficit, one of the biggest in the developed world.
Sterling was up 1 percent at $1.2240, after having tumbled to $1.2086 on Tuesday when it appeared it was heading back towards a 31-year low of $1.1450 hit on Friday. The euro too was down 1 percent at 90.25 pence.
“After weeks of tough rhetoric pushing sterling into a trading environment closer to an emerging market currency, the government may aim to stabilize markets, with its rhetoric and suggestions now possibly shifting in tone,” Morgan Stanley’s head of currency strategy, Hans Redeker, said.
“However, there is a fine line to walk as May’s Conservative Party wants a clean split from Europe. In addition, giving in too much, even before Article 50 negotiations have started, shifts the negotiation advantage towards the EU. Hence, the pound’s rebound should be limited and followed by a decline.”
The dollar index, which tracks the greenback against a basket of six major currencies, slipped 0.1 percent to 97.638 after hitting 97.758 on Tuesday, a post-March peak.
The euro was trading down at $1.1038, having fallen to $1.1032, its lowest since early August. Against the yen, it was flat at 103.53.
The dollar had been on an uptrend on rising expectations that the U.S. Federal Reserve would raise interest rates as early as this year, with markets pricing in about a 70-percent chance of a hike in December.
Investors awaited the minutes of the Federal Reserve Open Market Committee’s September meeting, scheduled to be released later on Wednesday, as well as U.S. retail sales data on Friday.
“There is an increased probability of bigger interest rate differentials between Japan and the U.S., so that is a factor for yen softening, although this is not as big a factor as it used to be,” IHS Markit’s principal economist in Tokyo, Harumi Taguchi, said.