The pound rose as investors seized on the prospect of the U.K. retaining preferential access to the European Union’s single market after Brexit.
Sterling climbed the most in almost two weeks against the dollar, reaching the highest since Nov. 11, as Brexit Secretary David Davis said the U.K. would consider making contributions to the EU in order to secure the best possible access to the single market. Dutch Finance Minister Jeroen Dijsselbloem told the Times of Malta that Britain might be able to participate in the internal market, albeit at a cost.
The pound’s advance is evidence of how sensitive the currency is to officials’ comments about the nature of Britain’s relationship with the EU once it quits the bloc. Sterling is the worst-performing major currency since the U.K.’s June 23 referendum, dragged down by concern the nation is headed for a so-called hard exit where unfettered single-market membership is sacrificed for immigration controls.
“If the U.K. does stay in the single market, it’s very likely that sterling will go up,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. The comments “very much shift the pendulum away from hard to soft Brexit. Embedded within a soft Brexit is access to the single market one way or another.”
The pound climbed 1 percent to $1.2631 as of 12:05 p.m. London time, paring its decline since the EU vote to 15 percent.
The FTSE 100 Index of shares, which is dominated by companies that sell goods abroad and benefit from a weaker currency, was set for the biggest drop in almost three weeks, falling 1.3 percent. U.K. government bonds declined with their euro-zone peers, pushing the yield four basis points higher to 1.46 percent.
“This is the first time we can recall a senior EU official acknowledge the possibility of the U.K. having access to the internal market since Brexit,” said Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd., referring to Dijsselbloem’s comments.