Pound Sterling Could Weaken Vs Euro but “Done Deal” on Brexit Means Downside is Limited Says Strategist

Economic data dominates the agenda for Sterling over Wednesday and Thursday while the European Council decision is the main event for Friday. 

The Pound-to-Euro exchange rate could reach new highs after any formal deal to progress Brexit negotiations this week, according to strategists at UniCredit, although technical analysts say it is vulnerable to a fall on Wednesday.

Prime Minister Theresa May is seen securing the backing of the European Council, Thursday, to allow talks to move on from “divorce” to the details of trade and transition to a new relationship.

Barring the odd dissenter, this is widely expected to support gains for the Pound into year-end, as concerns over a possible disorderly Brexit ease and the risk premium carried by the currency compresses.

“A done deal is likely to push GBP-USD higher, towards 1.40, and put pressure on EUR-GBP. A break of EUR-GBP below 0.8760 would expose the pair to more downside,” says Dr. Vasileios Gkionakis, head of FX research at UniCredit, referring to a level of EUR/GBP that puts the Pound-to-Euro rate at 1.1415.

Sterling broke briefly above the 1.1415 level Friday, after reports of a possible agreement between the UK and the EU first emerged, although it has failed to hold itself above here. The Pound traded back to the 1.1300 level against the Euro over the course of Monday and Tuesday.

“EUR/GBP has recovered this week following failure to register a weekly close below its 55 week ma. It sold off on Friday to the 61.8% retracement of the move seen this year at .8697, the strong rebound from here suggests it is reluctant to head lower at this juncture and we would allow for a rebound,” says Karen Jones, a technical analyst at Commerzbank.

That said, some are more sceptical of whether a simple agreement to move Brexit talks along will be enough to sustain an advance by the Pound.

“Despite the EU likely to ratify talks moving onto the second phase later this week, this rubber stamp is unlikely to be the game changer for GBP in the near-term as markets have anticipated that talks would progress into the second phase,” says Karmal Sharma, an FX Strategist at Bank of America Merrill Lynch.

Sharma predicts that a “deep transition” is a prerequisite for markets to become willing to bid the Pound outside of its recent ranges agains the Euro and US Dollar. 

“To us, this means GBP is attractive on weakness for the time being and the Bank of England is likely to remain peripheral until at least February, but more significantly until the contours of a transition agreement have been outlined,” the strategist adds.

With a Brexit deal unlikely to be confirmed until Thursday or Friday in any case, Pound traders will focus on economic data instead, with labour market numbers due Wednesday and the Bank of England’s latest monetary policy statement Thursday.

Both are possible sources of upside or downside for Sterling. Traders will watch wage growth data Wednesday for signs of life in UK pay packets, which is a necessary condition for further interest rate rises from the Bank of England.

The Pound was quoted 0.20% higher at 1.3345 against the Dollar at noon while the Pound-to-Euro rate was marked 0.26% higher at 1.1375.

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