• Updated 30 mins ago

UK pound finally finds its post Brexit vote feet

The pound surged 3 per cent, back above the $US1.24 mark, its biggest intraday leap since 2008.
The pound surged 3 per cent, back above the $US1.24 mark, its biggest intraday leap since 2008. Jason Alden
by Timothy Moore

The British pound, which was hammered after Britons voted on June 23 to leave the EU, appears to have established a new floor after Prime Minister Theresa May detailed her vision of what lies ahead.

Talk of further depreciation in the pound has dissipated for the moment as at least near-term uncertainty has diminished.

In a speech in London, Mrs May said UK negotiators would negotiate on 12 specific points when formal talks begin with their European counterparts, and if a "new partnership" cannot be agreed, then "no deal for Britain is better than a bad deal for Britain". 

In addition to being more detailed about what she is seeking, Mrs May made one critical concession, saying whatever accord is secured it will be put to a vote in both UK Houses of Parliament "before it comes into force".

Relief as shorts were forced to cover their negative bets.
Relief as shorts were forced to cover their negative bets. Bloomberg

The pound surged 3 per cent, back above the $US1.24 mark, its biggest intraday leap since 2008. It recently was at $US1.2413 at about 9.15am AEDT. The currency traded below $US1.20 earlier this week ahead of the prime minister's speech.

"There's no question that short covering played a big role in the currency pair's reversal because a hard exit has little positive ramifications for the UK economy," said BK Asset Management's Kathy Lien. "Yet uncertainty breeds volatility and while we definitely saw vol spike today in the pound, market participants were happy to see a clear path forward."

Lien said it seems "almost certain" that the UK Supreme Court will approve of Mrs May's plan to trigger Article 50, the first formal step in separating the UK from the EU, and that could boost the pound to $US1.25. "But as the reality of a hard exit sets in, sellers will return," she added.

The court is expected to render its decision within days.

Part of the pound's overnight advance also was linked to the latest inflation data in the UK. The data showed that consumer prices rose 1.6 per cent in December, accelerating from a 1.2 per cent pace the previous month. The data also showed that for producers, input price inflation leapt 15.8 per cent and output price inflation rose up to 2.7 per cent, both near five-year highs.

The pound has been pounded since the Brexit vote in June.
The pound has been pounded since the Brexit vote in June. Bloomberg

"Looking ahead, these pressures should continue to flow through to consumer prices and we think that CPI inflation will breach the 2 per cent target in a few months' time, peaking at a bit under 3 per cent in early 2018," according to Capital Economics.

The price statistics are the latest to show that the UK economy is more than holding its own post the Brexit vote. The upward momentum has even led Bank of England governor Mark Carney, previously pess    imistic on the outlook, to say the central bank may rethink its forecast for the economy. He also said while the bank would tolerate above-target inflation, there were limits too.

Another reason for the pound's advance, President-elect Donald Trump's jawboning of the US dollar, in saying its strength is hurting US competitiveness.

Longer term the sterling's fate remains linked to the expectation there will be a widening gap between US and UK interest rates, pointing to "further weakness in sterling against the dollar", said Capital Economics.

"In the coming days we will therefore be reviewing our forecast for the exchange rate, which has flirted with our year-end forecast of $US1.20 in recent days. Nonetheless, the chances of sterling being driven down a lot further by ongoing worries about Brexit now appear to be quite slim," Capital Economics said.