Pound-to-Euro Exchange Rate Hits Best Level Since July

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- GBP/EUR soars as Johnson Brexit dealy eyed

- Gains can extend near-term

- However, upside will be limited by view Brexit remains unresolved

- General Election also presents potential for uncertainty

Pound Sterling has on Thursday hit its strongest level against the Euro since July, as the market continues to see diminishing prospects for a disruptive 'no deal' Brexit taking place on October 31 and analysts tell us that the currency can rally further.

However, recent political events risk relegating British politics to a state of purgatory now that the government has lost control and has effectively being held hostage by a parliament that won't grant a fresh election.

We believe the next bout of volatility for the currency could potentially come when Prime Minister Boris Johnson makes his next move.

Parliament on Wednesday successfully passed a bill that seeks to force Johnson to ask for another Brexit extension from the EU, while at the same time voting down Johnson's request for a snap General Election to be held on October 14.

Only 298 MPs voted in favour of an election, 136 short of the two-thirds majority needed to carry the Government motion, after all but three Labour MPs either abstained or voted against it.

Despite the significant developments Sterling two-way volatility has died down, with the currency extending its rally against the Euro to trigger a high at 1.1161 on Thursday.

This is its highest level since July 29 and will provide some welcome relief to those looking to exchange their pounds for euros.

Banks are today seen offering exchange rates in a 1.08-1.09 bracket while independent specialist FX providers are offering rates towards 1.1030.

Above: Sterling is the best-performing major currency of the past month

Can the Pound continue to rise from here, and what are the key issues to keep an eye on?

At the start of the week our technical analyst Joaquin Monfort forecasted that the Pound would continue to make gains against the Euro in the short-term, in line with a trend that has been in place since mid-August.

Despite the bout of volatility seen on Monday, when the Pound dropped sharply, his forecast appears to be playing out nicely.

The analyst notes GBP/EUR has formed a ‘box’ price pattern recently, out of which it will probably break eventually in line with the prior uptrend.

Looking ahead, "a break above the 1.1100 level just above the top of the box will confirm a breakout to a target at 1.1200, which is roughly the same height as the box extrapolated higher, the usual method for calculating upside targets," says Monfort.

"If, as we expect, Brexit is delayed until January 2020 and an election is held after October, we would expect this recovery to continue. GBPUSD could rally above 1.30," says Daniel Trum, a foreign exchange strategist with UBS. "A deal could even bring it to 1.35."

For the Pound-to-Euro exchange rate, a Brexit delay until January 2020 could see 1.15 reached, and the upper 1.25s are possible in the event of a deal being struck.

Given Sterling tends to take its cues from the odds of a 'no deal' Brexit increasing or decreasing, it might come as little surprise that the moves in parliament coincide with a broad-based recovery in the UK currency.

Economist Kallum Pickering at Berenberg Bank in London says the odds of a 'no deal' transpiring have been reduced by recent developments.

Berenberg currently put the risk of a 'hard' Brexit at 40% but say recent developments, and the outlook for UK politics tilt the risk to this call to the upside.

Of course, the Pound is a politically-charged currency at present and with Brexit politics being so fluid, we are wary of significant moves in either direction.

At present the legislation seeking to block a 'no deal' Brexit is making its way through the House of Lords, and we know pro-government forces in the upper chamber are actively seeking to stall its progress.

Peers had been expected to sit through the night as Conservative lords plotted to filibuster the Bill to prevent it passing before Parliament is prorogued.

However, chief whip Lord Ashton of Hyde announced at 1.30am on Thursday that all stages of the bill would be completed by 5pm on Friday, suggesting the law to block a 'no deal' will pass.

We are now awaiting the Prime Minister's next move.

"Forecasting Brexit has gone from hard, to impossible. The fluid, politically charged situation means scenarios changes with the news cycle. Times like this we would just like some popcorn to watch the action from the sidelines. It looks like the UK is heading for another useless extension. One thing is for sure, for the UK's economic outlook, extra uncertainty will further damage economic growth and investor appetite," says Peter Rosenstreich, an analyst with Swissquote Bank.

Joshua Mahony, Senior Market Analyst at IG, says that while the Pound is benefiting from a swing away from a 'no deal' Brexit at present, a 'no deal' Brexit remains a distinct possibilit:

"The anti-'no deal' coalition are clearly emboldened by their growing strength, with Johnson’s calls for a general election expected to be rebuffed until anti 'no deal' legislation is passed. Ultimately, the circumstances leave plenty of room for a disorderly exit, with the prospect of a Corbyn-led period of extensions and uncertainty not the most exciting prospect.

"There is no doubt that any General Election would be difficult to call, and thus while a lifeline has been provided for the Pound, Boris Johnson still remains the favourite, with a no-deal now seemingly the default outcome."

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