LONDON (REUTERS) - The sterling firmed on Tuesday (Sept 24) after the British Supreme Court ruled that Prime Minister Boris Johnson's decision to suspend Parliament for five weeks was unlawful.
The top court's decision was seen as reducing the probability of Britain leaving the European Union without a divorce deal and increased the chances of a Brexit delay, sending the pound higher.
But the fact that it remained unclear when, how and whether, Britain will depart from the bloc prompted traders to lock in some of the gains, restricting its rise.
"This latest twist in the Brexit narrative likely delays the decision point for Brexit, but does not make it any clearer whether the UK will leave with a deal, without a deal or not at all," said Mr Edward Park, deputy chief investment officer at Brooks Macdonald Asset Management.
Mr Park said he remained underweight on most UK assets.
The court said that because the decision to suspend, or prorogue, parliament was illegal "immediate steps" for Parliament to resume should be taken "as soon as possible".
House of Commons Speaker John Bercow later on said Britain's Lower House of Parliament will sit on Wednesday.
This should allow the MPs more time to tighten up the legislation that would force Mr Johnson to delay Brexit to Jan 31, said Mr Paul Dales, chief UK economist at Capital Economics.
The court's decision also reduces Mr Johnson's ability to suspend parliament again, providing parliament with more leeway to prevent a no-deal, Mr Dales added.
Capital Economics puts the chances of a deal at 10 per cent, a no-deal at some point at 40 per cent, more delays at 45 per cent and of Britain staying in the EU at 5 per cent.
The pound surged briefly to a day's high of US$1.2491 immediately after the decision and was last up 0.3 per cent at US$1.2469. Against the euro, it rose by 0.2 per cent to 88.19 pence .
UBS Wealth Management told clients that the ruling only reinforced belief that a no-deal Brexit on Oct 31 was unlikely, meaning "we still see upside for the pound and are overweight it versus the US dollar in our FX strategy".
British bond yields rose following the decision and London's blue-chip share index slipped to the day's low. But a JPMorgan index tracking companies that make most of their revenue in Britain rose to session highs.
Nervous investors were also active on the derivatives market, buying protection against unexpected moves in sterling, sending one-month implied volatility gauges - which span the deadline for Mr Johnson to find a Brexit deal - to a three-week high.
The gauge slipped after the ruling.
Mr Johnson threatened to take Britain out of the EU on Oct 31 with no transition deal if Brussels declines to make concessions on the divorce agreement.
He said the aim of the suspension - from Sept 10 until Oct 14 - was to allow his Conservative government to bring in a new legislative agenda, and that few working days would be lost.
"This was not a normal suspension of Parliament," court president Brenda Hale said. The decision was unanimous.
More than three years after Britons voted by 52 per cent to 48 per cent in a referendum to leave the EU, Brexit's future remains uncertain.
EU Brexit negotiator Michel Barnier said on Monday it was difficult to see a way to break the impasse as Mr Johnson's demands on the Irish border were unacceptable.