Sterling-Euro at a Key Resistance Point but May Taking Control of Brexit Talks Tipped to Provide Support

Image © Number 10 Downing Street

- Markets welcomed May's decision to take direct control of Brexit talks

- Pound-to-Euro exchange rate currently @ 1.1260

- Resistance to recovery seen between 1.1261-1.1312

The British Pound has found itself better bid over recent days following the losses suffered in the previous week that took it to multi-month lows against both the Euro and US Dollar.

Aiding Sterling over recent days has been a shift in market focus towards the Bank of England which meets next week to decide whether or not to raise interest rates. However, developments on the Brexit front have also been constructive with news Prime Minister Theresa May is to increase her involvement in Brexit talks. 

"The Pound has outperformed following yesterday’s announcement from PM May that she will take personal control over the UK’s Brexit negotiating team. May’s decision to become more directly involved in Brexit negotiations as they enter a more crucial phase has been welcomed by financial market participants," says Lee Hardman, analyst with MUFG in London.

May's move "further adds to optimism that the recent shift in the UK government’s Brexit strategy will help to unblock Brexit negotiations, which had stalled in recent months on the back of Irish border concerns. In the past when PM May has become more involved, it has helped talks to progress," adds Hardman.

However critics have suggested the move gives greater power to Olly Robbins, one of Theresa May's most trusted advisors at the expense of newly-installed Secretary of State for Exiting the European Union, Dominic Raab.

Robbins has widely been credited for frustrating former Secretary of State for Exiting the European Union, David Davis, while being a key architect behind the Chequers Brexit blueprint.

The blueprint has been derided by those members of May's own party who believe it does not offer a clean break from Europe, while businesses have cautiously welcomed the proposals which promise little disruption to trade.

Currency markets have sympathies with the latter assessment.

"Market participants are likely to view the announcement as a further sign that the UK government is softening their Brexit stance. In these circumstances, it is understandable that the Pound has staged an initial relief rally," says Hardman.

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Gains at Risk of Fading

However, "the scope for further Pound gains in the near-term remains limited by the still heightened level of Brexit uncertainty," warns Hardman.

Further barriers to the British Pound's potential to advance against the Euro are meanwhile also posed by the technical construction of the market, with analyst Robin Wilkin at Lloyds Bank warning that a key resistance point for the GBP/EUR exchange rate looms.

Wilkin says for the Euro, "momentum remains in bear mode" but the GBP/EUR pair is now seen o be approaching important short-term resistance in the 1.1260-1.1312 region.

Resistance zones tend to thwart a trend in the market as they are where market participants look to book profits on a move, or enter counter-trend moves.

How this technical battle resolves itself could depend on the outcome of a meeting of the two main Brexit principles in Brussels on Thursday where they will assess this week's progress in Brexit discussions; we are not sure as to whether it will be Theresa May or Dominic Raab who will be meeting Michel Barnier.

Either way, Barnier's assessment of the state of negotiations could decide whether the Pound can crack through resistance and extend higher.

We will also be watching the European Central Bank's July policy meeting for guidance on the Euro, although most analysts we have heard from are not holding out for fireworks.

"Daily measures remain in bear mode and, if anything, outlier risks to the ECB are to the downside for the EUR," says Wilkin.

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