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Pound surges after minister opens door to EU access

The pound climbed to its highest level against the euro in almost three months after a rare public comment from the government on its strategy for leaving the EU, adding further momentum to the currency’s November rally.

The pound was worth €1.1940 for the first time since September 7 after David Davis, so-called Brexit secretary, told MPs the UK would consider paying for access to the single market after it left the EU, the first time a minister has publicly discussed such a scenario.

Britain wanted “the best possible access for goods and services to the European market”, Mr Davis said, and if making a contribution to the EU budget was needed to achieve that, “of course we would consider it”.

Sterling rose 1.1 per cent against the euro and 1.5 per cent on the dollar, at one stage being worth $1.2695, and taking it higher than its 50-day moving average. It also climbed 1.4 per cent higher on the yen.

The gains added to the pound’s strong run, with the currency notably withstanding the dollar’s rally that has dominated the foreign exchange market since Donald Trump’s election victory triggered market expectations of a fiscally-driven rise in inflation and bond yields.

The pound has strengthened against the dollar by 3.3 per cent in the past month, while on a trade-weighted basis, it rose 4.8 per cent in November, its best month since January 2009.

The pound tends to do well when the dollar is strong because of links between the US and UK corporate sectors, while Europe faces a succession of political risk events.

However, analysts were cautious as to whether the pound can maintain the momentum.

Alan Wilde, head of multi-sector fixed income at Barings, warned against jumping to too many conclusions about the government’s Brexit stance.

“I don’t see much more clarity in the direction of travel from the government. Single market access is one message but the clear policy to have control over UK borders is a red line in the sand,” Mr Wilde said.

Sterling’s strong support showed that the currency was a “bit of a head scratcher”, said Brad Bechtel at Jefferies International. Short of clear Brexit signs from the government and without fundamental drivers, the moves in sterling were being driven by technical flows, and he added: “We could be in for a bit of a wild ride.’’

Also supporting the sharp rise in the pound on Thursday were signs of investors being shaken out of bearish positions in the currency.

Kit Juckes, macro strategist at Société Générale, said a clear-out of short sterling positions may be under way “as the dollar rally runs out of steam somewhat, the focus shifts to European political uncertainty, and the market becomes more aware that whatever ‘hard Brexit’ means, the government will be aiming to negotiate something a little softer”.

In the long term, however, the likely direction of the pound was lower because of squeezes in real incomes and government finances, Mr Juckes added.

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