Pound Surges As Government Loses Lawsuit

Market Trends - 03/11/2016

The Pound is riding higher on the session as the perfect storm of events carries the currency to its highest level in weeks versus the US dollar.  The beginning of the latest momentum in Sterling was catalyzed by a High Court ruling released earlier in the session.  After much deliberation, the High Court responded to a government lawsuit that any move to trigger Article 50 to leave the European Union requires Parliamentary approval.  For Prime Minister Theresa May and the Conservative party, this is a serious setback that could potentially derail any exit despite months of negotiations.  Should Parliament vote against any such move, the ramifications could be serious for the outlook of the UK.  However, considering the Conservative party has a slight majority, should they be able to cobble together a few more votes, an exit may still be possible.  In the meantime, the Pound has responded positively to the development, namely because it reduces the risk of a “Brexit” altogether.

Adding to the upside momentum in the Pound was a decision by the Bank of England to hold monetary policy constant.  The Monetary Policy Committee voted unanimously to leave rates at 0.25% while downplaying the possibility of further rate cuts.  Even though the Central Bank reiterated that it is willing to let inflation run above its 2.00% target, they explained that their tolerance for inflation running higher than the target is limited and will likely trigger higher rates.  The MPC statement largely diminished the prospect of further rate cuts, with the Central Bank underlining its willingness to be flexible in response to changing conditions.  However, the less dovish stance shined through, sending the Pound surging even further, adding to the momentum sparked by the High Court ruling.  With the outlook looking increasingly bright for the economy, positive sentiment is rapidly returning to the Pound, adding to the upside potential in the GBPUSD pair over the near-term.

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