Brexit-related developments are likely to override any domestic political and economic developments for Sterling, and this could be supportive.
The Pound-to-Dollar exchange rate could be set for further gains over coming days and weeks, according to a number of strategists, as a breakthrough in Brexit talks might be close and the bar for domestic data and politics to break the current uptrend is high.
With less than a week to go before a Brussels imposed deadline of “sufficient progress” and barely three weeks until the December European Council summit, hailed as a crunch moment for whether the UK will see an orderly departure from the EU, the present and coming days are pivotal for Sterling.
“We anticipate GBP/USD will lift towards levels around 1.3600 by mid-December on positive Brexit-related developments,” say Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia.
Standing between the Pound and higher levels are European Union demands for “sufficient progress” on the “divorce bill”, citizens rights and the border between Northern Ireland and the Republic of Ireland.
“In our view, the European Council (EC) will assess that sufficient progress has been achieved on citizens' rights, the border between Northern Ireland and Ireland and the UK's financial obligations to the EU at their 14-15 December meeting,” adds Haddad.
Above: Pound-to-Dollar rate at 2 hour intervals.
The event does however binary risks; "whether or not the EU summit will be able to give the green light for further negotiations remains a binary risk. So, we don’t expect GBP investors to place big directional bets until there is clarity on this issues," says Austin Hughes, at KBC Markets in Dublin.
Negotiator Michel Barnier has imposed a December 04 deadline for this “sufficient progress”, given the proposals will need to be put before the rest of the European Council in time for the summit in the middle of the month.
“Reports of PM May being ready to pay a £40bn Brexit Bill is constructive - though we think GBP's price action will be more contingent on the prospects of whether we get a 'gentlemen's agreement' over a transition deal,” says Viraj Patel, a strategist at ING Group.
Moving talks along to the subject of trade at the December summit, in time for the New Year, is key because all will need to be agreed before October 2018 if an eventual deal is to be ratified by all parliaments in the European Union.
“The next couple of weeks will see a lot of noise in the build up to this - noise that we think could be ultimately positive for GBP, especially if it continues to ascribe a 'good chance' to there being progress made in Brexit talks,” adds Patel.
Discussions over transitional agreements are also important in order to allay fears among businesses over a sudden rule change come the March 2019 deadline when the UK is scheduled to depart the EU - on paper if not in practice.
“We think the bar is fairly high for domestic politics to actively weigh on GBP - the real focus will be on factors that could meaningfully delay Brexit talks,” says Patel.
Above: Pound-to-Dollar rate at daily intervals.
The Pound has been hit by political scandal and concerns over the stability of the government in recent weeks but signs of progress, or a continued absence of, are seen overriding any ongoing concerns over the government’s survival.
“The pair (GBPUSD) has moved up to the 1.33 level but has failed to push on - likely due to the lack of appetite amongst investor to take a clear directional view ahead of the key Brexit-focused Dec EU summit,” says Patel.
Patel and the ING team have a one month target for the Pound-to-Dollar rate set at 1.3500, slightly below that of Commonwealth Bank, and suggested in a note Monday that the pair could trade as high as 1.3450 in the current week.
The Pound-to-Dollar rate was quoted 0.15% higher at 1.3348 during morning trading Monday.
Meanwhile, trend trading specialist Phil Seaton, who runs LS Trader, notes the GBP/USD uptrend to be intact:
"The British Pound has held support and has consolidated this week above its 50-day MA, keeping the long-term uptrend intact. Price also remains above the 200-day MA. However, the RSI is butting its head against the 60 level, which is bull market resistance.
"A move above last week’s high accompanied by a decisive move above 60 on the RSI may give rise to higher prices, possibly back to the local top at 1.3695."
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