Potential Pound-to-Euro Exchange Rate Gains on Tap this Week: Barclays

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- Reduction in risks to support Pound Sterling over coming days

- Bank of England unlikely to have material impact on Sterling this week

- ECB meeting on Thursday more likely to shake GBP/EUR

- TD Securities say GBP/EUR could be at top of short-term range

The British Pound starts the new week relatively unchanged against the majors with 1 GBP buying 1.1183 Euros on the inter-bank market, ensuring the UK currency maintains the previous week's advance.

And we are told by analysts at UK lender Barclays that on balance the Pound could advance against the Euro further over coming days; but any strength is likely to be modest.

"In the UK, we expect attention to focus on Brexit negotiations ahead of the EU summit on September 20, rather than on the BoE meeting. The more positive tone between the UK and EU supported the pound last week, and a reduction of risk premia could bring mild EUR/GBP downside, although two-sided headline risk is high," says a note from the currency strategy desk at Barclays at the start of the new week.

(EUR/GBP downside = GBP upside).

Sterling remains highly responsive to Brexit headlines showing volatility to both bad and good news.

However, it has been observed that because markets are heavily engaged in downside bets on the currency; the biggest potential moves are to the upside in the event of rare pieces of good news pertaining to Brexit.

"The GBP continues to oscillate on political headlines, and risks in the near-term remain two-sided, although heavy short positioning and a large negative risk premium discounted in the currency likely imply larger moves to the upside on positive political headlines," add Barclays.

Indeed, over recent days the big moves have been higher with the currency putting in its biggest one-hour move higher for 2018 in response to newswire reports Germany was willing to drop some key demands in order to ensure a withdrawal agreement is reached before end-2018.

Furthermore, we have noted the negotiations have been progressing via updates from various negotiators: in the previous week UK negotiator Dominic Raab told a parliamentary committee that talks were 80% complete, last week minister David Lidington said negotiations were 85% complete and on Friday, September 10 EU negotiator Michel Barnier was reported to have told Austrian Chancellor Wurz that talks were 90% done.

We attributed these comments as being a factor in ensuring the Pound ended the week higher against the Euro.

Therefore, what we have are concrete signs of progress which should go some way in calming market fears that a 'no deal' scenario will transpire.

Negotiators are now in agreement that the withdrawal agreement deadline might be moved into November having originally been set for October.

But, "any progress that suggests an earlier agreement presents upside for the Pound," say Barclays.

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Pound-Euro at top of Range, Bank of England Unlikely to Provide Support: TD Securities

The Bank of England is in focus this week with the September policy decision falling on Thursday, but markets are expecting the event to offer little direction to Sterling as no major decisions or guidance are likely.

We are afterall a mere month out from the Bank's 0.25% rate rise where they also gave their latest forecasts for the future of the economy.

As such, it might well be a case of the Bank keeping settings and guidance on auto-pilot.

Most analysts expect the Bank's Monetary Policy Committee to deliver an unanimous vote for keeping interest rates unchanged.

"As Brexit negotiations intensify this autumn, the MPC is unlikely to veer far from their August script until further progress is made on this front or unless a material shift in economic momentum occurs," says James Rossiter, Senior Global Strategist with TD Securities in London.

What does this expectation mean for the likely direction of the British Pound in the coming week?

"We think GBP is likely to remain constrained by larger forces," says Rossiter who believes the Pound-to-Euro exchange rate might actually take more guidance from the meeting of the European Central Bank, also due Thursday.

"EURGBP looks set to be led by this Thursday's ECB meeting," says Rossiter.

Market positioning meanwhile favours a counter-trend squeeze higher taking place owing to the fact traders are heavily committed to the "sell Sterling" trade.

"Considering that speculative accounts have built a short base amounting to nearly 30% of total open interest, we think Sterling could be a candidate for a sharp short squeeze if the news-flow turns more positive," says Rossiter.

Concerning the outlook for the Pound vs. Euro near-term:

"For EURGBP, we think the cross may remain contained within the 0.8940/0.9100 range unless a fresh catalyst emerges - most likely from the EUR side," says the TD Securities strategist.

EUR/GBP 0.8940/0.9100 gives a range in GBP/EUR of 1.1180-1.11, which puts the exchange rate at the top of this range at the start of the week.

For the Pound-to-Dollar exchange rate, Rossiter says he sees good support arising around the 1.2800 mark ahead of the 15 August cycle low of 1.2662.

"A push above 1.3045 could attract additional buying interest, particularly as cable has seen a meaningful accumulation of short positions over the last several weeks," says the strategist.

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