In my particular case, I was working with Docker for Windows from Edge channel. So I just uninstalled it and installed the latest release from Stable channel https://docs.docker.com/docker-for-windows/install/#download-docker-for-windows. It worked out and the problem went away.

I was using Docker for Windows Server 2016 (Edge channel) and got this issue as well. However I was unable to switch to anything. After finding issue on github here: https://github.com/docker/compose/issues/4710 It was apparently a bug in relative paths.

One of the developers released a new binary for docker-compose.exe(see previous link) for which you can replace manually in your local docker installation. After that it worked for me again.