UK pound finally finds its post-Brexit vote feet

The pound surged 3 per cent, back above the $US1.24 mark, its biggest intraday leap since 2008. The currency traded below $US1.20 earlier this week ahead of the Prime Minister's speech. Meanwhile, the Aussie dollar slumped about 1.7 per cent against the pound, to 60.9 pence, a level it was holding late on Wednesday.

"The price action in sterling suggested the market is struggling to get new mileage out of the hard Brexit story, at least for now," ANZ analyst Brian Martin said.

"In other words, the current risk premium for holding UK assets may be sufficient and this week is the first real suggestion since the Brexit vote that that might be the case."

Based on producer prices, sterling is estimated to be 33 per cent undervalued against the US dollar, and using the Big Mac index the degree of undervaluation is estimated to be about 25 per cent, Mr Martin noted.

"The robust performance of the UK economy is something that has very much been overshadowed by politics in recent weeks," he said.

But BK Asset Management's Kathy Lien predicted that the sellers would eventually return, saying that short covering played a big role in the currency pair's overnight reversal.

"Uncertainty breeds volatility and while we definitely saw [volatility] spike today in the pound, market participants were happy to see a clear path forward."

Ms Lien said it seemed "almost certain" that the UK Supreme Court would approve Mrs May's plan to trigger Article 50, the first formal step in separating Britain from the EU and that could boost the pound to $US1.25.

"But as the reality of a hard exit sets in, sellers will return."

The court is expected to render its decision within days.

Inflation trending up

Part of the pound's overnight advance also was linked to the latest inflation data in Britain. The data showed that consumer prices rose 1.6 per cent in December, accelerating from a 1.2 per cent pace the previous month. The data also showed that for producers, input price inflation leapt 15.8 per cent and output price inflation rose up to 2.7 per cent, both near five-year highs.

"Looking ahead, these pressures should continue to flow through to consumer prices and we think that CPI inflation will breach the 2 per cent target in a few months' time, peaking at a bit under 3 per cent in early 2018," according to Capital Economics.

The price statistics are the latest to show that the UK economy is more than holding its own post the Brexit vote.

The upward momentum has even led Bank of England governor Mark Carney, previously pessimistic on the outlook, to say the central bank may rethink its forecast for the economy. He also said while the bank would tolerate above-target inflation, there were limits too.

Another reason for the pound's advance, President-elect Donald Trump's jawboning of the US dollar, in saying its strength is hurting US competitiveness.

Longer term sterling's fate remains linked to the expectation there will be a widening gap between US and UK interest rates, pointing to "further weakness in sterling against the dollar", Capital Economics said.

"In the coming days we will therefore be reviewing our forecast for the exchange rate, which has flirted with our year-end forecast of $US1.20 in recent days. Nonetheless, the chances of sterling being driven down a lot further by ongoing worries about Brexit now appear to be quite slim," Capital Economics said.