THE pound advanced for a second day and gilts fell as the UK government said it had secured changes to its divorce deal from the European Union and planned to hold a vote in Parliament.
Sterling climbed as much as 1.1 per cent against the dollar after having gained 1 per cent on Monday amid optimism that progress is finally being made to resolve the Brexit standoff. European Commission President Jean-Claude Juncker urged the British Parliament to approve the deal as he and UK Prime Minister Theresa May briefed reporters.
Rodrigo Catril, a senior foreign-exchange strategist at National Australia Bank Ltd in Sydney, said: "If PM May gets her deal through, that would be very positive for the GBP, but an avoidance of a hard Brexit and an extension would still be good news and see the GBP head toward US$1.35.
"We remain optimistic that a hard Brexit will be avoided, and that, in our view, should put a floor on GBP."
Sterling pared some of its earlier advance in European trading and was up 0.6 per cent at US$1.3227 as of 8:20 am in London. It climbed 0.4 per cent to 85.20 pence per euro. UK government bonds fell at the open in London, with 10-year yields climbing four basis points to 1.22 per cent. Britain's domestically focused FTSE 250 stocks index rose 0.2 per cent.
The pound has rallied 3.7 per cent versus the dollar and 5.5 per cent versus the euro this year, as the market increasingly expects Britain to secure an agreement with the EU over its exit terms. It remains unclear whether the revised deal will satisfy Parliament when it votes late on Tuesday.
Mrs May put forward three new documents intended to provide additional legal guarantees that the UK cannot be trapped indefinitely inside the current backstop arrangement. The status of these documents will be scrutinised intensively during Tuesday's debate. The papers include a "unilateral declaration" setting out how the UK believes it can escape the backstop.
The new agreement seems to fall "short" of the plan Parliament wanted to see, said Steve Baker, a pro-Brexit member of Mrs May's Conservative Party. A panel of euro-skeptic politicians will examine her latest blueprint in detail, he said. Mrs May's Attorney-General Geoffrey Cox is expected to set out his formal legal opinion on the changes.
Vassili Serebriakov, a macro strategist at UBS Securities LLC in New York, said: "The situation is very fluid, but the market is perceiving hard-Brexit scenarios as increasingly unlikely."
Traders are also putting Bank of England's interest-rate increases back on the agenda. Sterling money markets were pricing a 50 per cent chance of a rate hike by December, up from 40 per cent on Monday. BLOOMBERG