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Pound Sterling Tipped to Consolidate this week by CBA

Foreign exchange rate markets

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The British Pound is likely to adopt a more sedate posture over coming days according to an analyst we follow.

Elias Haddad, a foreign exchange strategist with Commonwealth Bank Australia, says the Pound will "consolidate over the coming week supported by favourable Brexit developments and encouraging UK labour market conditions."

The call comes with Sterling being quoted close to where it closed the previous week against most major currencies with the headline Pound-to-Dollar exchange rate seen at 1.4022 at the time of writing, having started the week at 1.4031.

The Pound-to-Euro exchange rate is at 1.1296 having opened at 1.1303 while the Pound-to-Australian Dollar exchange rate is at 1.7710 having started the new week at  1.7734.

Haddad's focus on Brexit headlines as being a potential source of stability for the Pound is interesting, particularly as we have seen Sterling start to take notice of the issue once more and the result has been the currency has given up its early-2018 run higher against the Euro and Dollar.

Nevertheless, Haddad believes talks between the EU and the UK are heading toward an orderly UK withdrawal, citing recent hints to such an outcome being made by chief EU negotiator Michel Barnier.

Furthermore, "meanwhile, at a joint press conference German Chancellor Angela Merkel encouraged UK Prime Minister Theresa May to aim for a tailor‑made trade deal after Brexit rather than choose trade deal options like the one the EU has with Norway or the one with Canada," says Haddad.

Of course others might adopt a different interpretation on how talks are progressing at the moment but the important point to note is that no substantive developments have occurred, or indeed, are likely to occur this week.

Markets will therefore be wary of bidding the Pound higher or lower at this point precisely because they know what really matters is the final outcome of each round of negotiations. With that in mind, late March will be key as we get a clear idea as to whether the prospect of a transitional deal is likely to be reached as negotiators approach the month-end deadline.

Another reason Haddad suspects the Pound will remain rangebound is owing to the outcome of the key UK data on tap this week.

On Wednesday, the UK December ILO unemployment rate is expected to remain near a 42‑year low of 4.3% and UK average weekly earnings (excluding bonus) growth is widely expected to print around 2.4%.

"The probability of a 25bps Bank of England (BoE) rate hike at the May meeting is high at about 60%. Consequently, average weekly earnings data will have to surprise significantly to the upside for GBP to materially benefit," says Haddad.

Medium-term, CBA maintain a neutral stance towards the Pound vs. Euro exchange rate saying the early start to the Bank of England's tightening cycle and positive Brexit-related developments will guide the Euro lower against the Pound, "but the downside will be limited by: (i) a well-performing Eurozone economy; (ii) Any poor Brexit-related outcomes, (iii) real interest rate differentials, and (iv) current account balance differentials."

However, CBA are "mildly bullish" on the GBP/USD over the multi-week timeframe saying GBP/USD will be supported by the drawn-out rate hiking cycle by the Bank of England.

"GBP/USD will also be supported by modest depreciation in the USD (see above). We anticipate Brexit-talks and deals with generate a modest appreciation in GBP/USD. But rises will be limited by (i) any poor EU-UK Brexit negotiations; (ii) negative U.K.-U.S. interest rate differentials; and (iii) the U.K.’s large current account deficit (5.1% of GDP)," says Haddad.

With regards to the AUD/GBP exchange rate, more-of-the-same is also likely with Haddad saying, "AUD/GBP will remain well-supported because of favourable global economic activity. But positive Brexit-related developments can lead to a lower AUD/GBP. Downside pressure in AUD/GBP will be limited because of Australia’s, positive real interest rate differentials, and better current account balance differentials."

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