By Mike Bird

The British pound rallied Tuesday after a speech by Prime Minister Theresa May, which investors said suggested Brexit may not be as harsh as feared..

Ms. May said the final Brexit deal would be put to a vote in parliament, where a majority of lawmakers were against the U.K. leaving the European Union before the country's referendum last June.

Sterling rose by as much as 2.5% against the U.S. dollar. The pound rose by around 1.5% versus the single currency. Shortly after the speech ended, the pound was up 2.2% at $1.23 and up 1.6% at 1.15 euros.

The rally continued despite remarks later in the speech that conceded the U.K. would leave the EU's tariff-free single market.

"You can see there was a big bounce after she mentioned that both houses of parliament would have to vote on the agreement," said Alvin Tan, foreign- exchange strategist at Société Générale, referring to the U.K.'s house of Lords and Commons.

"It's positive because given the stated remain views of the majority of members of parliament, in a sense it would help to get a deal that is not too harsh," Mr. Tan added.

The pound has fallen by around 19% against the dollar since the referendum and declined steeply in the days ahead of Mrs. May's speech.

Mrs. May said she aimed for the freest possible trade in goods and services with the EU. She added, though: "What I am proposing cannot mean membership of the single market."

EU leaders have repeatedly stressed that full membership of the single market would require accepting unlimited freedom of movement for EU citizens.

The pound had tumbled to a 31-yearlow against the greenback on Monday after several U.K. newspaper reported that Mrs. May would signal in this speech that Britain was leaving the single market.

Rupert Harrison, a strategist at BlackRock and former senior U.K. Treasury official, tweeted that the pound's move was logical given that the "bad news" had been briefed and Mrs. May was now adding relative certainty.

The U.K's Brexit plan, outlined by Mrs. May, would see the country leave the EU's customs union, which provides common external tariffs for member states, in its present state.

"The speech has reduced some of the worries that things can go more extreme and the government's approach would be more aggressive," said Themos Fiotakis, co-head of foreign-exchange strategy at UBS.

There were several other potential factors helping the pound higher on Tuesday.

Sterling had already risen considerably against the dollar before the speech began, recoveringsome of its losses from Monday.

The dollar has fallen against most currencies on Tuesday, with the WSJ Dollar Index down almost 1%.

U.K. inflation data released Tuesday was also stronger than expected, with both core and headline measures of consumer prices rising by 1.6% in the year to December. That increases the likelihood of interest rate rises, which tends to boost a currency because it draws money into a country.

Adding further fuel to the pound, Mrs. May said in her speech that the government would take a "balanced approach" to the U.K's budget deficit and invest in "economic infrastructure."

A rise in government spending could boost economic growth and inflation, at least in the short term.

Britain's benchmark equity index, the FTSE 100, fell by 0.6% on the announcement that Brexit would be put to parliament. The companies listed on the index are heavily exposed to international revenue and tend to performbetter when the pound weakens.

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

(END) Dow Jones Newswires

January 17, 2017 09:43 ET (14:43 GMT)

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