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Pound-to-Euro Exchange Rate: Analysts Sceptical the Bounce Can Last

- EU strikes a more constructive tone regarding Brexit negotiations

- Fears of 'no deal' Brexit diminish

- More short-term gains possible

- But, gains to ultimately be capped as political hurdles remain


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The British Pound is, at the time of writing, the best performing major currency of the past week thanks to a bout of relief buying stemming from fading fears that the UK and EU are headed for a 'no deal' Brexit.

A 2.08% advance against Japan's Yen and a 1.73% advance against the Dollar are the stand-out moves.

However, a 1.0% advance against the Euro is notable in that the Pound's performance against the single-currency is instructive as this exchange rate is widely seen to be the best marker for Sterling's performance relating to Brexit sentiment.

EUR/GBP proved a better gauge of Sterling sentiment being sullied by markets prepping for an outcome in which Britain and Brussels fail to reach a trade deal before Brexit commences in late March. No trade deal would risk subjecting the U.K. economy to growth-sapping uncertainty," says analyst Joe Manimbo with Western Union.

The British Pound surged higher against a host of major currencies mid-week following comments from chief EU Brexit negotiator Michel Barnier that "the EU is preparing to offer a partnership with Britain such has never been with any third country."

Analyst Viraj Patel with ING Bank N.V. describes the comments as "monumental for GBP."

The Pound-to-Euro exchange rate recovered from 11-month lows at 1.0990 to peak at a weekly high at 1.1167 in the wake of further constructive news from France's Emmanuel Macron. Reports suggest the influential European leader will aim to push fellow leaders towards a deal at a summit due to be held in Austria next month.

The developments serve to suggest the market might have been overly pessimistic on the EU and UK's desires to strike a Brexit deal.

Near-Term Gains

Concerning the outlook for Pound Sterling from here, ING's Patel says the Pound could shoot much higher as "no deal Brexit risks get priced out."

He suggests the GBP/USD exchange rate could go as high as 1.31-1.32, which should ensure a firm base is placed under GBP/EUR.

Roberto Mialich, FX Strategist with UniCredit Bank says, "Sterling may remain firm after talks circulated yesterday that the UK and the EU might drop the current deadline for a Brexit deal, which is currently set for 18 October, when the EU summit also takes place."

Mid-November seems now to be the new end-date for divorce talks, giving the two parties more time to reach a deal.

Kathy Lien, Director of BK Asset Management says the EU's willingness to cooperate should be enough to take GBP even higher; "speculators are aggressively short sterling and today's breakout will motivate traders to cover their shorts. We see GBP/USD rising to at least 1.3050 and possibly even 1.32 on short covering flows alone."

Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole says he remains cautiously optimistic on the outcome of the Brexit negotiations and this underpins a moderately bullish longer-term view on GBP against both EUR and USD.

"That said, we would wait for more concrete indications of progress before changing out cautious near-term outlook for the currency," cautions Marinov.

What is striking about the above positive views is that they all cover the short-term.

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