Sterling hit a two-month high against the dollar on Tuesday as investors bet the British government would lose its battle to begin the formal process for leaving the European Union without parliamentary approval.
The government has appealed to the Supreme Court to overturn a ruling by another court last month that threatens to derail its Brexit plans.
The High Court ruled in November that Prime Minister Theresa May could not trigger Article 50 of the Lisbon Treaty and begin two years of Brexit talks with the other EU members without parliamentary backing — a ruling that sent the pound surging.
Investors believe that greater parliamentary involvement would reduce the chances of a “hard Brexit” in which tight controls on immigration are prioritised over European single market access, which they fear would weigh on the economy and push down the value of the pound.
A government lawyer said on Tuesday that the government would need to put forward a parliamentary bill to trigger Article 50, should it lose its appeal.
Sterling climbed as much as 0.4 percent on the day to hit $1.2775 in morning trade in Europe, before easing back to trade up around 0.2 percent on the day around $1.2750.
“Although we may get some important headlines toward the end of the week, there is a lot to be done before we have a final outcome,” said IronFX currency analyst Charalambos Pissouros.
“We would expect the pound to continue trading higher, at least heading into next week’s Bank of England policy meeting.”

Hard brexit?
Sterling has climbed almost 6 percent against the dollar since the start of October, when it was trading around $1.20 on expectations for a hard Brexit — a view driven in large part by comments from May and other senior members of the ruling Conservative party at its annual conference.
The suggestion last week by Brexit Minister David Davis that the government may be willing to pay into the EU budget in return for access to the single market helped the pound hit five-month highs of 83.05 pence against the euro on Monday, with the pound also boosted by stronger-than-expected data from Britain’s dominant services sector.
It was slightly off those highs on Tuesday at 84.17 pence, up half a percent on the day.
The Supreme Court hearing is due to last for four days but the verdict is not expected until January.
“The government really does have to argue this one extremely well if it’s going to overturn that (High Court ruling) — that’s the view of the market,” said Rabobank currency strategist Jane Foley.
“However, there is a huge amount of uncertainty around that, and from that point of view I think sterling is at the very least likely to see a lot of volatility and still remains pretty vulnerable. I think there’s limited upside potential from these levels.”

Source: Arab News