The pound to euro and pound to dollar exchange rates could be boosted if George Osborne gets his way at the G20 Summit this weekend.
Having watched the GBP undergo a spectacular drop over the past two months we have been increasingly interested in the question surrounding the potential for a GBP recovery.
Indeed, we have heard many in the foreign exchange community suggest that sterling is now oversold in the near-term, and while the longer-term picture flavorous further declines, a sharp and notable relief-rally could be on the cards.
There are reports ahead of the weekend meeting of G20 finance ministers that Chancellor George Osborne has indicated he is hoping to establish G20 support for Britain staying in the EU.
“Should the UK manage to include into the G20 communique the reference of the Brexit being a risk to the global financial stability (as the news overnight suggest), there is a scope for a short-term GBP relief rally on Monday given the large degree of Brexit risk premium priced into GBP,” says Chris Turner at ING.
ING modelling suggests that around 3-4% of risk premium is currently priced into GBP/USD, equivalent to the peak levels priced into GBP ahead of the Scottish referendum and UK parliamentary elections.
This suggests that the Brexit story may now have inflicted its worst on the pound, for now at least.
“While the outlook for GBP is still viewed as bearish, severely oversold conditions coupled with early signs of momentum slowing down suggests low odds of extension lower to the next support at 1.3800,” says a strategy note from UOB.
Economic data has been largely overlooked this week but the ONS reported economic growth of 0.5% throughout the previous quarter showing the UK to be outperforming its G7 rivals.
The news did help sterling to arrest the downward trend on Thursday.
The longer-term picture does still remain shaky with investment bank analysts rushing to the printing press to try and outdo each other with their horror stories as to what awaits sterling in the event of a UK exit from the European Union.
HSBC have even said parity in the pound to euro exchange rate cannot be discounted.
Has Osborne Got his Way?
So if the Chancellor is able to secure some kind of backing from the G20 for the UK to stay in Europe we could determine that this is a positive for the In camp, and the pound by extension.
Reports on Saturday suggest Osborne may have achieved his wish.
Reports in the Guardian suggest a leaked document states Britain’s possible exit from the European Union could pose a risk to the world economy.
The report notes, "the shock of a potential UK exit from the European Union," as one of the risks to the global economy at present.
Watch the Polls
However, latest polling data shows no bounce for the In campaign despite PM Cameron's push and the gloom-and-doom warnings from major business leaders.
The survey was taken by the ORB pollster for The Independent newspaper published on Friday.
The poll, carried out on Feb. 24-25, showed support for the Out campaign had risen to 52 percent from 48 percent a month ago, while support for the In campaign had fallen to 48 percent from 52 percent a month ago.
Exchange Rates Today: GBP Trades Higher, Supported by Month-End Flows
The pound to euro exchange rate is trading at 1.2721, up from Thursday’s close at 1.2667. Bank transfers are being seen at around 1.2365 while independent payment providers are offering tighter spreads at around 1.25-1.2340.
The pound to US dollar exchange rate is above 1.40 again with banks offering international payments around 1.3650 with independent providers offering payments towards 1.38.
Near-term we are in a consolidation phase, with 1.40 and then 1.4140 the main resistance levels we are watching.
"A move up through these levels would alleviate some of the bear pressure on sterling, especially as the currency is so far out-of-line with the rates market, with 1.43/1.44 main resistance above. Month end flow may well start to feed in today, which may increase volatility," say Lloyds Bank in a note to clients.
However, the trend lower remains intact but the significant zone of support - in place since the 1980s - that is 1.35-1.40 will continue to thwart further selling pressures on the GBP/USD.
The British pound was the week’s biggest loser, suffering its worst performance against the dollar since 2010 this week as investors grew increasingly worried about the U.K. leaving the EU.
Brexit worries mounted after a number of high profile Conservative lawmakers, including London’s charismatic mayor, joined the movement to leave the EU in a big blow to Prime Minister David Cameron, who has staked his political future on keeping the U.K. in the 28-member bloc.
A Brexit could seriously damage capital investment in the U.K., which depends on steady inflows of investment to help fund its massive current account deficit, one of the largest in the developed world.
The pound’s direction remains tied to the day-to-day headlines and polls related to the nation’s view on staying or leaving the EU.