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Pound-to-Dollar Rate: Big Money Speculators Eye 1.33s by end-October

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- GBP/USD climbing on positive Brexit headlines

- Move above the 1.3317 38.2% fib level would solidify bullish case

- Big money speculators see a move above 1.3350-1.35 by end of October

Pound Sterling retains a bullish feel against the U.S. Dollar amidst market anticipation for the brokering of some kind of Brexit deal by the end of next week, possibly even earlier.

Sentiment has improved as politicians have now appeared to have circumvented the Irish border question by making a no-deal backstop U.K.-wide so in the event of there being no-deal the whole of the UK will remain in the EU customs union.

At the time of writing, the whole process is hanging on whether or not the U.K. can secure a time limit for the backstop deal. Reports suggest the U.K.'s lead Brexit negotiator Dominic Raab cannot endorse a Brexit deal which does not include a set time limit on customs union membership.

EU diplomats from the 27 member states are meeting in Luxembourg today and one of the items on the agenda is the current Brexit proposal.

It is possible feedback from the meeting, and the EU's current stance could inform the debate and the Sterling exchange rate before the weekend.

For the GBP/USD's broader outlook, a break above 1.3317 would help the bullish case for the pair, according to analysts from Thomson Reuters.

"Close above 1.3317, 38.2% 2018 fall would put bulls in charge," says Andrew Spencer, an analyst on the Thomson Reuters currency desk.

The 38.2% level is a Fibonacci retracement from the April 2018 peak down to the 1.2661 August trough lows.

GBP to USD weekly

It is often said that the market has a tendency to correct back to certain key levels and these correspond to what are called Fibonacci ratios, which are ratios of the previous main move. One of those is 0.382 or a 38.2% pull-back.

In the case of GBP/USD, this corresponds with the aforementioned 1.3317 level.

If struck, this would put GBP/USD well above where consensus see the pair ending 2018. (For an indepth report into where 50 of the world's leading investment banks see GBP/USD going please download this report from Horizon Currency. The report includes targets set by Goldman Sachs, Barclays, Morgan Stanley and HSBC.)

It means this is a pivotal level where the market could either stall or rotate and resume its longer-term downtrend. Of course, it could also just break higher and continue rising. Such a break would lend the uptrend strength from overcoming a key barrier on the way up. It is expected that a break above 1.3317 would reinvigorate bulls and see the exchange rate gain a boost higher.

Near-term we see a break above the 1.3258 highs probably leading to a move up to 1.3300 and possibly even 1.3317 where the 38.2% line is.

GBP to USD daily

A break above 1.3325, would then confirm a break above 38.2% and green-light a move up into open territory where there is little resistance until the 200-day MA at 1.3490.

The short-term trend since the October 1 lows is now bullish as evidenced by the sequence of two or more higher highs and higher lows on the four-hour chart. As the old adage goes, "the trend is your friend" so the default expectation is for it to continue.

GBP to USD 4HR

Data from the options market highlights further levels to watch.

I surge in GBP/USD calls with strike prices in the 1.3350 - 1.3500 region strongly suggests that the speculators expect the pair to climb well above these levels by late October when the options are set to expire. At expiry, holders have the option to buy at the strike price - if the market is higher they can sell back to the market at the higher market price and profit from the difference.

The data suggests increased confidence in GBP/USD rising to well above 1.35 on a resolution to Brexit before the end of October.

A massive 1.5bn option expiry happening on Monday at strike prices between 1.3235-1.3250 (New York cut), is another level worth watching. The expiry could impact the market in two ways.

Firstly, it could lead to a phenomenon called 'pinning' around the time of the cut during the US session on Monday. Pinning happens when the exchange rate gets drawn magnetically towards the expiry strike price as option writers try to manipulate the market so they do not end up losing money to option-holders when the options expire.

Or, if the market has already moved substantially away from the expiry level something called a 'gamma explosion' can occur. This is when option writers decide to give up trying to manipulate the market back to the strike price and instead join the trend, pushing the exchange rate even further away from the expiry strike price.

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