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Pound eyes $1.25 as traders bet British government to lose Brexit case

By Jemima Kelly

By Jemima Kelly

LONDON (Reuters) - Britain's pound surged to its highest in five weeks on Monday as investors priced in a defeat for the government in its appeal against a ruling that forces it to consult parliament before formally triggering EU exit talks in March.

British Prime Minister Theresa May will learn at 0930 GMT on Tuesday whether judges have upheld a High Court decision in November that her government must get parliamentary approval before triggering Article 50 of the Lisbon Treaty, the formal means of exiting the bloc.

Expectations of a government loss - spreadbetter Betfair shows a 90 percent probability that the Supreme Court will endorse the earlier ruling - drove sterling to $1.2495 on Monday, its highest against the dollar since Dec. 19.

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But traders - both human and computer - will scour the decision for clues on whether regional assemblies will get a say - one of a number of other as-yet-unknown factors that threaten the government plans, which have proven unpopular with investors.

That could drive sterling volatility - elevated in recent months and behind the biggest one-day rise in the currency since the 1990s last week - to spike on the decision.

"While the Supreme Court ruling that the parliament needs to approve Article 50 is probably in the price, should the Supreme Court (also) rule that parliament needs a say in the exit strategy details, sterling could get a further lift," said ING's global head of EMEA research, Chris Turner.

"We are very bearish on sterling/dollar this quarter, but are wary that this week could see a correction into the $1.25-26 region."

COMPUTER TRADES

Key words that algorithm-driven trading models - which take up an increasingly large slice of currency markets - have been programmed to react to in a binary manner are likely to act as the initial sterling triggers. Human traders, who need more reaction time, will follow behind.

"It's not just a case of which way they rule – the exact wording of what sort of involvement parliament will have will be important (too)," said MUFG currency strategist Lee Hardman.

"The knee-jerk reaction will probably be to see the pound strengthen, but the upside would probably be fairly modest on the back of that," he added.

While the thrust of the case centers on whether the British parliament has to give its assent, the judges also heard arguments from the Scottish government and lawyers for Northern Irish challengers that Britain's devolved assemblies must give their approval too.

Should the court agree - an outcome ministers believe is unlikely - an ongoing political breakdown in Northern Ireland could derail May's timetable, following the collapse of the province's power-sharing government.

"A key risk would be if the court were to give Scotland’s and Northern Ireland's assemblies a say, as that could trigger a potential constitutional crisis," Citi currency analyst Nishtha Asthan wrote in a note to clients.

However, if that ruling were to simply lead to a delay in the triggering of Article 50 without a crisis, investors said that could boost the pound.

"Anything that’s going to disrupt (the government’s plans) would be sterling-positive," said Ian Gunner, currency fund manager at hedge fund Altana.

May has said she will trigger Article 50 by the end of March, and last week detailed her vision for a clean break with the EU by quitting its single market.

Though that effectively meant Britain would undergo the "hard Brexit" many investors have feared, May's relatively conciliatory tone and the fact that she had removed a layer of uncertainty was interpreted as a positive by markets - sterling soared by 3 percent on the day of the speech against the dollar <GBP=D4>.

As well as the gains against a weakened dollar, the pound rose 0.6 percent to as high as 85.85 pence per euro on Monday.

(Additional reporting by Patrick Graham; Editing by Gareth Jones)