FX Focus: Pound hits two-month high against dollar amid increasing hopes of 'soft Brexit'

The pound hit a two-month high against the dollar on Tuesday (6 December), amid increasing hopes that Britain could secure a so-called "soft Brexit".

Sterling hit $1.2775 earlier in the session, the highest level against the US currency since 4 October, before relinquishing some of the gains to trade at $1.2748 by early afternoon, 0.17% higher against the dollar.

The gains came as Chancellor Philip Hammond admitted Britain had not ruled out paying into the European Union budget in return for access to the single market.

"We want to keep all options open," he said ahead of meeting fellow finance ministers in Brussels.

"That is something we would have to look at, looking at the costs and the benefits based on what is in the best interests of the British taxpayer."

The pound was also 0.27% higher against the euro, trading at €1.1858, as the common currency pulled back from the two-week high it reached in the previous session, as investors continued to digest the implications of Italy's constitutional referendum.

"While the short-term gains in the euro are very impressive, it may be too early to gauge the impacts of Sunday's referendum results with more time needed in the New Year to digest the reality," said FXTM research analyst Lukman Otunuga.

"There still exists a layer of uncertainty over the next steps Italy may take and such could encourage the European Central Bank to extend its quantitative easing programme at December's policy meeting."

The euro was also lower against the dollar and the yen, losing 0.23% against the former and 0.16% against the latter, to trade at $1.0739 and ¥122.33 respectively.

Jordan Hiscott, chief trader at Ayondo Markets, suggested the outlook for the common currency was far from positive and parity with the real dollar by the second quarter of 2017 was a real possibility.

"Europe in general, from a political stance, becomes more fragmented, and when it comes to euro/dollar I also find it hard to be optimistic," he said.

"With the ECB easing in monetary terms and the US Federal Reserve now tightening [its policy], the natural set-up for this is a lower euro/dollar. I find it hard to believe we won't be challenging parity by the second quarter next year."

There was, however, some positive news for the euro as a report showed the Eurozone economy grew in line with expectations in the third quarter, but the annual pace was revised to indicate a slightly bigger gain than expected.

According to Eurostat, in the three months to the end of September, the economy in the common currency bloc grew 1.7% year-on-year, compared with a 1.6% figure recorded in the previous three months. This was also higher than the initial reading released at the end of October, which stood at 1.6%.

Elsewhere, aside from gaining against the euro, the dollar was broadly unchanged against the yen and the Canadian dollar but rose 0.22% and 0.13% against the Swiss franc and the Australian dollar, exchanging hands at CHF1.0086 and AUD$1.3400 respectively.