* Graphic: sterling and gilt yields bit.ly/2dgAXn1
* Graphic: sterling year-to-date tmsnrt.rs/2egbfVh
(Updates prices, edits)
By Patrick Graham
LONDON, Oct 18 Sterling jumped the most in three
months in a rollercoaster session on Tuesday, as suggestions
that parliament will have to ratify a British deal to leave the
European Union outweighed concerns about a larger-than-expected
rise in inflation.
Lawyer James Eadie, representing the government in a High
Court challenge over who has the right to trigger divorce talks,
helped send the pound above $1.23 for the first time in a week
by saying parliament would "very likely" have to ratify
any Brexit agreement.
The currency also gained more than 1 percent against the
euro and on the Bank of England's trade-weighted index, putting
aside concerns that the rise in inflation signalled more
headwinds for an economy facing two years of extreme political
The gains drove buying of UK government bonds, pushing
yields down 4 basis points after a week which has seen them
surge as a general rise in global yields is exacerbated by
investors taking fright at Brexit risks.
"The price action this morning highlights the sensitivity of
the pound to headline news on Brexit," said Kamal Sharma, G10
strategist for Bank of America Merrill Lynch in London.
"It shows that political uncertainty is a more significant
driver for the pound than the data. The market is short pounds
and is coming off a string of hardline comments from the
government -- this (Eadie's comments) has provided some relief."
Concern Britain is heading for a "hard Brexit" in which it
loses access to the single market in order to impose controls on
immigration have knocked 7 percent off the pound in the past
three weeks. It has fallen by a fifth in value since the Brexit
vote in June.
Investors generally assume British lawmakers as a whole are
less in favour of a hard line on Brexit than Prime Minister
Theresa May and the ministers she has put in charge of
Data on Tuesday showed the first signs of the pound's fall
feeding through more aggressively into higher prices of consumer
goods, driving the biggest rise in inflation in two years, even
though headline annual price growth remains at only 1 percent.
Any rises in price pressures in the low inflation
environment that has become the norm in modern developed
economies have tended to support currencies because they
represent rising demand pressures that should lead to
policymakers raising domestic interest rates.
But members of the Bank of England's monetary policy
committee have said they will look through any short-term impact
on inflation to allow a weaker pound to cushion exporters and
the economy in general from Brexit-related uncertainty.
That leaves many analysts concerned that sharply higher
prices of staple goods like fuel, food and other imported goods
may cool domestic demand.
"We think higher inflation is negative news for the pound
--the opposite to the typical impact of positive inflation
surprises on G10 currencies recently," RBC analyst Adam Cole
said in a morning note.
"With the BoE likely to look through a transitory
acceleration in inflation, the main effect will be to squeeze
households' real income as prices rise more quickly than wages,
crimping consumer spending."
By 1600 GMT, sterling was up 1 percent on the day at
$1.2307. With the dollar broadly weaker, it hit an 11-day high
of 74.7 against the trade-weighted basket of currencies used by
the BoE to measures the British currency's broader strength. It
was 1.1 percent higher at 89.32 pence per euro.
Ten-year gilt yields dropped more than 4 basis
points to a low of 1.077 percent.
In a study of Britain's current account deficit -- seen as a
key economic risk -- under differing Brexit scenarios, Goldman
Sachs analysts said they expected more falls in sterling.
"Our main result is that -- even with the large declines
that have already occurred -- the trade-weighted pound is still
around 10 percent overvalued if a smaller current account
deficit is the norm going forward," Goldman Sachs analysts said
in a note to clients.
"In short, sterling is not yet cheap."
(Editing by Catherine Evans and John Stonestreet)