The pound has risen to its highest level against the dollar since July, breaking through the $1.24 mark as fears recede that the UK is on the brink of crashing out of the EU without a deal.

Sterling shot up 1.1 per cent against the dollar on Friday morning to $1.2465. Analysts said markets were “breathing a sigh of relief” as the chances of a no-deal Brexit appeared to have faded. The currency gained 0.7 per cent against the euro to trade at €1.1218.

Traders’ jitters have been soothed this week as a bill became law that forces the government to seek an Article 50 extension and avert a no-deal Brexit next month.

John Bercow, Speaker of the House of Commons, bolstered this sentiment late on Thursday with a warning that he would allow parliament to do whatever it takes to stop the prime minister attempting to flout the law and deliver a no-deal Brexit on October 31 regardless.

There were also reports overnight in The Times that the Democratic Unionist party was willing to shift some of its red lines and support a Brexit deal that created a regulatory border between Northern Ireland and mainland Britain — potentially easing Boris Johnson’s path to striking a deal with Brussels. However Arlene Foster, DUP leader, rejected these claims as “nonsense”.

Friday’s gains mean sterling has risen 1.3 per cent against the dollar this week and 3.1 per cent since its lows earlier this month.

“The relief rally for the pound mainly reflects market participants breathing a sigh of relief that imminent no-deal Brexit and UK recession risks have eased,” said Lee Hardman, an analyst at MUFG.

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“However, we believe there is only limited scope for the pound to extend its advance at the current juncture with UK political and Brexit uncertainty set to remain elevated in the coming months.”

Sterling’s gains have been helped by weakness in the dollar, as trade tensions between the US and China appear to be thawing. President Donald Trump said on Thursday he would consider striking an “interim deal” with China, days after agreeing to push back an increase in existing tariffs on $250bn worth of Chinese goods.

The dollar is among the haven currencies traders move into in times of high volatility. As tension eases and investors eye riskier assets, the dollar tends to fall.

As markets look ahead to fresh Westminster drama in the coming weeks, Adam Cole at RBC Capital Markets notes that the pound is now “trading in near-lock step” with the risk of a hard Brexit, adding that, as far as the currency is concerned, this is now the “conduit through which incoming political news should be judged”.

In equities, the FTSE 100 fell as the pound rallied, shedding 0.2 per cent. The broader FTSE All-Share index slipped 0.1 per cent. In Europe, the composite Stoxx 600 was flat.

Via Financial Times