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Pound-to-Euro Exchange Rate Eases Back: Tusk-May Meeting to Dominate Near-Term Outlook

Tusk and May meeting

Image © Number 10 Downing Street

Pound Sterling has given back some of this week's strong advance against the Euro over recent hours with the exchange rate paring back to 1.1480 ahead of a key meeting between Prime Minister Theresa May and European Council President Donald Tusk on Sunday.

The declines, are however modest in the context of this week's 0.8% advance in the GBP/EUR exchange rate, the high for the week currently sits at 1.1538,  and we maintain a view that traders could be locking in some of the profits made from Sterling's strong performance ahead of the weekend. The GBP/EUR exchange rate's low of the week is located at 1.1403.

Foreign exchange markets have keep Sterling relatively well bid amidst an ongoing flow of news that suggests the EU and UK are making progress in forging a Brexit deal that can be stomached by a majority in the UK House of Commons.

With this in mind, eyes now turn to a weekend meeting between UK Prime Minister Theresa May and European Council President Donald Tusk.

The two figures will hold a bilateral meeting on the sidelines of an EU summit in Egypt on Sunday at 16:30 local time in Egypt.

Officials have told the Reuters newswire that leaders will however not clinch a deal on Brexit during the summit, scheduled for Sunday and Monday.

"There will be no deal in the desert," the official said when asked about chances of a Brexit breakthrough during the EU summit with the League of Arab States in Sharm el-Sheikh on February 24-25, simply for the fact that Brexit is not on the agenda.

News from the Tusk-May meeting will however be critical for setting the tone for Sterling next week; recall this week is scheduled to see some important votes on Brexit in the UK parliament.

Yesterday we heard from Chancellor of the Exchequer Philip Hammond that there could well be an opportunity for the staging of a "meaningful vote" on the Brexit deal as early as next week as talks have thus far been "good and constructive".

Hammond made the suggestion after reflecting that ongoing talks between the EU and UK had seen "significant" discussion on alternatives to the Irish backstop, and that these talks had been "good and constructive".

Could it be that next week the deal is finally put to parliament for a make-or-break outing? If so, then we could see some explosive moves in the British Pound with the general rule-of-thumb being that the currency will move higher on a deal passing but move lower on it failing.

Even if there is no final vote, there is still an amendable motion on the government's Brexit position that must be brought forward by the government. This will allow parliamentarians to give their approval of the government's current strategy, and it also gives the chance for amendments to be tabled.

Expect amendments forcing the government to 'take a no deal off the table' to be presented.

"If next week’s vote delivers another defeat for Mrs. May’s Brexit strategy and, against our expectation, MPs fail to take steps to force her to request an extension to Article 50, markets are likely to get nervous, as the 29 March deadline is approaching fast and a no-deal Brexit is the default option if nothing else is agreed. At the moment, however, hopes that a no-deal Brexit can be avoided are still prevailing, and the GBP has stabilised," says Kathrin Goretzki, a foreign exchange Strategist with UniCredit Bank in London.

While the Pound is hovering towards the upper end of an ongoing range against the Euro, we are wary that any disappointments next week could trigger a technical reaction that sees the exchange rate decline towards the lower end of the range.

We have heard from a leading City of London analyst that there are limits to the Pound's strength in the current environment, and if anything the currency is more likely to succumb to losses than break higher into fresh multi-month highs.

Bill McNamara - founder of The Technical Trader and a former analyst with brokers Charles Stanley - says after running higher in January 2019, the balance of risks for the Pound's movements against the Euro now lie to the downside.

"After running up to an intermediate high of 1.1576 towards the end of last month the UK currency went into retreat and, as the daily candlestick chart demonstrates, there’s a technical explanation for that price action, which is that it represents a failure at resistance in the form of the peak that formed last April (at 1.157)," says McNamara.

Technicals Pound to Euro

Technical studies and technical levels remain highly relevant to the Pound-Euro exchange rate and we will continue paying close attention to the view of technical analysts such as McNamara who read price charts to determine future direction as a result.

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