By Mike Bird

The British pound surged Thursday after a court ruled that the U.K. government needs parliamentary approval to trigger Britain's exit from the European Union and the Bank of England stood pat on interest rates.

Analysts said sterling might extend its gains in the coming days as investors scramble to cover short positions. But the pound has been falling against the dollar since the U.K.'s June 23 vote to exit from the bloc and many analysts expect that downward pressure to persist as investors refocus on continuing economic uncertainty.

The High Court ruled that Prime Minister Theresa May couldn't begin formal negotiations to leave the EUwithout a parliamentary vote. Parliamentary lawmakers largely supported remaining in the bloc, and though few are expected to defy the referendum result, a vote could delay the exit process or force the government toward a softer version of Brexit.

"Short positions have been running at very high levels, near all-time highs, so there is this potential for a move higher over the days ahead, " said Neil Mellor, currency strategist at BNY Mellon. "But the prevailing view is the risks are still geared toward the downside."

The pound rose by 0.8% immediately after the ruling was announced, climbing to $1.245, up by over 1%. It jumped higher again at midday in London, when the Bank of England's monetary policy committee announced a unanimous vote to hold interest rates and its bond buying program unchanged in November. That took the pound to a high of $1.248, up 1.44% on the day.

The BOE now expects inflation to rise to 2.7% by the end of next year, well above the official 2% target. That could constrain the central bank in terms of its ability to cut rates further, or expand the quantitative easing program, two measures aimed at shoring up the U.K. economy against the potential effects of Brexit.

Cutting rates and bond buying often hit a currency because they push down yields, making the local market less attractive for foreign investors.

Sterling had already been rising this week, from lows of around $1.215 to above $1.235 on the morning of the court ruling.

Some analysts said that Thursday's sharp move higher may be fueled by investors covering short positions--buying sterling to close the bets they had made on it declining further.

Roger Hallam, currencies chief investment officer at J.P. Morgan Asset Management, had bet on a weaker sterling since the Brexit vote but in October took profits on that short position when the currency fell to the region of $1.22 and $1.23 against the U.S. dollar. The court ruling combined with better-than-expected recent economic data led Mr. Hallam to suggest sterling could rise further in the coming days "as the market digests what [the ruling] means."

Either way, analysts expect further volatility as the government appeals in the U.K.'s Supreme Court. Should that bid fail and parliamentary debates on Brexit begin, the pound could face additional flux.

Meanwhile, most are sticking to their negative outlook on the currency, unsure whether Thursday's decision will eventually have much impact on the Brexit process.

British government bonds appreciated on the court ruling Thursday, but later gave up those gains after the BOE revised its inflation forecasts higher.

The U.K's benchmark FTSE 100 fell 0.23%, the only major European market in negative territory. The U.K.'s major listed companies earn most of their revenue outside the U.K, soa rise in the pound can be negative for the index.

Jason Douglas contributed to this article.

Write to Mike Bird at Mike.Bird@wsj.com

(END) Dow Jones Newswires

November 03, 2016 11:43 ET (15:43 GMT)

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