LONDON (Reuters) - The pound rose on Thursday after the release of the British government’s blueprint for future relations with the European Union reinforced hopes that the UK is headed for a so-called “soft Brexit”, in which trade ties remain close.
The size of the bounce was small, however, as much of the content of the government’s white paper policy document was already priced in.
Markets are also concerned that the EU will demand more concessions from Britain before agreeing a deal, leaving months more uncertainty ahead.
Prime Minister Theresa May’s government outlined its plans to retain the closest possible ties with the bloc, although there was one major shift — the government abandoning plans for close trade ties for Britain’s huge financial services sector.
“The dial has shifted somewhat, the paper is being seen as a move away from some of the more hard Brexit signals from this government,” said WorldFirst Head of FX Strategy Jeremy Cook.
“The EU won’t vote for it, and neither will (British opposition party) Labour or the Brexiteers ... so its unlikely to go anywhere. But if it provides a framework for softer Brexit conversations with the EU that could send sterling a bit higher.”
The pound rose to as high as $1.3244, up 0.3 percent on the day. It traded around $1.32 before the white paper was released.
Sterling also gained against the euro, up 0.2 percent to 88.27 pence per euro.
The British currency had tumbled more than a cent after Boris Johnson and David Davis quit as foreign secretary and Brexit minister on Monday in protest at May’s plan, stirring talk of a leadership challenge. But with May holding on for now, a favourable response from the EU to Thursday’s blueprint could lift the pound further.
“We see a good chance of Brussels accepting this document as the basis for restarting Brexit negotiations ... resulting in a period of outperformance for the pound,” said analysts at MUFG.
A sluggish economy and a strong dollar left sterling nursing its worst quarter versus the greenback since the 2016 Brexit vote, but there are signs the tide is turning.
Investors reckon that with more clarity over the sort of Brexit the British government envisages, the path will be clearer for the Bank of England to begin normalising monetary policy.
Tentative signs of a stronger economy have lifted expectations of an August interest rate hike to more than 60 percent from less than 50 percent two weeks ago.
Reporting by Tom Finn and Tommy Wilkes; Editing by Catherine Evans