By Yumna Mohamed
LONDON (Reuters) - Sterling traded close to a four-week high on Friday and was heading for its best week since March, having jumped after England's High Court put a spanner in the government's plans to forge ahead with Britain's exit from the European Union.
The battered pound has clawed back 2.5 percent against the dollar this week
The pound surged to a four-week high close to $1.25 on Thursday after the court's decision that the government needed parliamentary approval to trigger Article 50, which will formally start the process of exiting the EU. On Friday it remained close to that high at $1.2480.
Investors are hoping that Britain might now be able to avoid an economically disruptive "hard Brexit", reckoning lawmakers - a majority of whom supported staying in the EU in June's referendum - will now be emboldened and will push for Britain to keep access to Europe's single market.
CMC Markets analyst Michael Hewson said political factors were dominating, with sterling also benefiting this week from a dollar weakened by fears that Donald Trump could win the U.S. presidential election. "I often think markets are a bit like men - they can only focus on one thing at a time," he said.
"We're seeing a bit of a relief rally now that the worst case scenario of a unilateral 'hard Brexit' has been deferred, and markets can start focusing on other factors (like) the U.S. presidential election."
The pound started climbing earlier in the week when Mark Carney said he would stay as head of the Bank of England for an extra year to help with a smoother Brexit negotiation process.
It was further boosted on Thursday by the BoE's decision to scrap its plans to cut interest rates and raise its forecasts for 2017 growth and inflation, and also by robust data from Britain's services sector.
But despite this week's rebound, sterling is still 16 percent lower against the dollar than where it was before June's EU referendum. Against the euro, it is 14 percent weaker (EURGBP=D4) and was trading at 88.90 pence on Friday.
"We believe that the economy, as well as BoE monetary policy, do not justify the current sterling weakness, but that politics will remain the most volatile component in the equation, preventing sterling from a decent recovery just yet," UBS strategist Constantin Bolz said in a note.