Pound-to-Euro X-Rate Eyes 1.1360 Resistance Following Brexit Vote

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- Outlook remains constructive for Sterling

- Sterling rallies to highest level since December vs. Euro

- Top of the GBP/EUR range could be at 1.1360 say Danske Bank

- Expect 'bumpy' conditions to persist

The British Pound retains a positive tone against the Euro with the GBP/EUR exchange rate having risen 1.60% over the course of the past week, setting up a positive trend in the pair short-term.

At the time of writing one pound buys 1.13 euros on the inter-bank market, with the current week's high set at 1.1313 which also represents 2019's best.

While Brexit headlines will remain a driver and cause of volatility, analyst Robin Wilkin with Lloyds Bank says the exchange rate has remained on the offensive after breaking up through the 1.1186/1.1223 resistance region.

Wilkin says the exchange rate is now testing another resistance area around 1.1305/1.1325 and a break here would suggest further upside potential, "albeit in a choppy manner," towards the more significant resistance region between 1.15 and 1.16.

Gains in the UK currency come in the wake of the government's record-breaking defeat in the House of Commons on Tuesday night that saw MPs oppose the EU-UK Brexit deal by a margin of 230 but open the door to further Sterling-positive Brexit outcomes.

The rally in the British Pound suggests markets are of the belief that the stars continue to align against a 'no deal' Brexit taking place on March 29 with a number of analysts saying the chances of the Brexit deal passing with meaningful amendments has risen sharply.

"Despite the staggering scale of the loss in the Meaningful vote and the Labour party triggering the no confidence vote, the FX market found a silver-lining and GBP strengthened," says Petr Krpata with ING Bank N.V. in London.

Krpata says there is an increased likelihood that Prime Minister Theresa May is likely to seek cross party support for the next deal, with the perceived odds of the Article 50 extension rising.

Indeed, we hear this morning that Germany's Foreign Minister Heiko Maas says Europe will approach any requests for an extension of Article 50 constructively.

ING estimate that the probability weighted outcome for GBP has marginally improved - "by one big figure for both EUR/GBP and GBP/USD based on our estimates," says Krpata.

Krpata warns the near-term price action for GBP will however remain "very bumpy".

"There is still a non-negligible likelihood of hard Brexit (around 20% in our view) with its potential detrimental outcome for GBP. This makes outright long GBP positions tricky," says the strategist.

Mikael Olai Milhøj, Senior Analyst with Danske Bank, says he is expecting EUR/GBP to stay in the 0.88-0.9060 range until further Brexit clarification is secured.

This means the Pound-to-Euro exchange rate will remain in a 1.1360-1.1037 range, suggesting the limit for the pair is at 1.1360.

Milhøj says an extension of Article 50 would be positive for GBP as it reduces the risk of a ‘no deal’ Brexit, "while pressure on GBP might increase due to rising uncertainty as 29 March moves closer".

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Looking ahead, we would expect Sterling to be largely untroubled by Wednesday's vote of no confidence in the government with no signs of rebellion being seen in the Conservative party and Northern Ireland's DUP saying they will vote with the government.

Prime Minister Theresa May has indicated she will consult senior parliamentarians from across the politica divide over coming days in order to try and establish a consensus on what deal might be possible from the European Union.

The European Union have meanwhile confirmed they are open to further talks, but changing the substance of the Withdrawal Agreement is not possible. The EU appear to therefore be of the view ultimately the UK will pivot to a softer Brexit: the kind of Brexit Labour MPs could support as it is this kind of Brexit that can be delivered by further talks.

"We maintain our base case that a close variant of the current Brexit deal will ultimately command a majority in the House of Commons. But, in our view, today’s developments skew the risks to that base case further towards a softer, later Brexit - or no Brexit at all," says Adrian Paul with Goldman Sachs in London.

Goldman Sachs are forecasting the Euro-to-Pound exchange rate to be at 0.85 in three months, this gives a Pound-to-Euro exchange rate of 1.1765.