The pound jumped to its highest in three weeks against the dollar on Wednesday, as investors sold the greenback on worries that Donald Trump could win the US presidential election next week. With opinion polls narrowing, investors are rethinking long-held bets on a Nov. 8 victory for Democrat Hillary Clinton.
They worry a Trump victory could delay the rise in US interest rates they expect the Federal Reserve to deliver in December, which would weaken the dollar.
Sterling hit as high as $1.2355 earlier in the day, after Prime Minister Theresa May's said government would do its best to secure a good deal for the agriculture sector when Britain leaves the EU, during her weekly questions from parliament.
It had already been given a boost by news London's High Court will deliver its verdict on Thursday on whether British parliament as a whole, rather than just the ruling Conservative government, must invoke Article 50, which will begin the formal process of leaving the European Union.
"There is dollar weakness across the board because of a tightening in the polls and repricing of the Fed," said ING currency strategist Viraj Patel.
"But for sterling in particular you've got a bit of uncertainty ahead of tomorrow's Bank of England meeting and we've got this Brexit ruling as well - those could both bring favourable outcomes," he said.
The BoE will announce its latest policy decision and quarterly inflation report on Thursday.
Sterling's fall - almost 20 percent since the vote for Brexit - is expected to push the BoE to raise its inflation forecasts to show a bigger overshoot of its price target than at any time since it gained independence in 1997.
Ratings agency S&P said on Wednesday that sterling was now undervalued by as much as 15 percent, but that it will stay around its current levels for some time, with the BoE likely to look past a rise of inflation past its 2 percent target in order to focus on mid-term growth, and therefore to keep monetary policy accommodative.
Sterling has climbed 1.2 percent this week, boosted on Monday by news that Bank of England Governor Mark Carney will extend his tenure to 2019.
Carney's decision eased concern about threats to the Bank's independence in an uncertain political environment, where worries over a "hard" UK exit from Europe's single market have sent sterling tumbling.
"Brexit is the primary driving force at the moment," said Richard Wiltshire, chief FX broker at ETX capital. "Any rallies in sterling are capped by the fear of the unknown."
By 1640 GMT, the pound was up 0.6 percent on the day at $1.2312. Against the euro, it was steady at 90.24 pence.
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