Sterling steadied on Tuesday after a senior European Union legal adviser said Britain could unilaterally withdraw its Brexit notice, easing some concern among investors about Britain crashing out of the bloc in March without a deal.
The advice from a European Court of Justice advocate general is non-binding but the prospect of a route out of the Brexit process cheered the market, even as Prime Minister Theresa May pressed ahead with plans for a parliamentary debate on her divorce deal with the EU.
The pound had spiked to a day's high of $1.2840 versus a broadly weak dollar before relinquishing its gains to trade flat at $1.2734. Against the euro it rose 0.1 percent at 1640 GMT to 89.17 pence. The growing chance of averting Brexit altogether - potentially via a second referendum - has led some investors to start pricing out the prospect of a damaging "no deal" departure from the EU, analysts said, lifting sterling.
"If the European Court decides to support this opinion ... it will reinforce the hand of those who want the UK parliament to overturn the referendum result and stay in the EU," said CMC Markets' chief analyst Michael Hewson. "That may well be positive for the pound in the short term but could be poisonous for politics in the UK," he added.
May's spokesman said on Tuesday that the British government is not going to revoke its notice to quit the European Union. May has secured an agreement with EU leaders that will see Britain leave the bloc in March next year with continued close trade ties, but the odds look stacked against her getting it through a deeply divided British parliament.
Lawmakers are trying to force the government to hand over more power to parliament if the current deal is voted down. Opposition Labour finance spokesman John McDonnell said last week a second Brexit referendum "might be an option we seize upon".
The comments raised expectations the Labour party could back putting Brexit to a second vote though it is unclear what impact such a prospect would have on sterling. "A lot of dire developments would probably have to take place first before a second referendum happens," said analysts at MUFG.
Recent positioning data suggests hedge funds have started to unwind large short positions on sterling as hopes grow that Britain may manage to negotiate an orderly Brexit. But growing domestic opposition to May's Brexit arrangement has continued to pressure sterling, pulling it down 3 percent from a Nov. 7 high of $1.3176.
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