"Pound at Pivotal Levels With Plenty to Undermine it": Technicals

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- Pound Sterling is close to key gateway levels

- These are 1.2900 vs. USD, and 1.1300 vs. EUR

- Expectations for heightened volatility in GBP are rising

Pound Sterling is trading at make-or-break levels against both the Dollar and Euro according to the latest studies of the market structure of EUR/GBP and GBP/USD.

"GBP/USD and EUR/GBP are poised above pivotal supports, but may have different outcomes as the Pound looks vulnerable on a number of fronts," says Andrew Spencer, a foreign exchange analyst on the Thomson Reuters currency desk.

The level to watch on GBP/USD is 1.2900 which, if breached, would open the gateway to deep declines down to a target at the 1.2787 September low - a 113 pip drop.

EUR/GBP, meanwhile, has shown resilience at staying above its key floor of 0.8850-65, (a ceiling of 1.1300 for GBP/EUR) after the Euro recovered following an easing in Italian deficit fears.

It could now be poised to start moving higher again if the Pound loses ground, however a break below support could yield further gains for Sterling.

"Italy's budget deficit targets, the recent major EUR-negative, showed progress yesterday ... and unless there is a Brexit breakthrough or a sense of discipline and unity in the UK government, which appear unlikely for now, the bias for GBP remains lower," says Spencer, who advocates buying EUR/GBP, with a stop-loss below 0.8830 (1.1330 GBP/EUR), and a target at 0.9000 (1.1115).

This trade provides "decent risk-reward," adds the correspondent.

For GBP/USD, continued strong growth in the US economy and the probability that the Federal Reserve will continue to tighten monetary conditions - which usually supports the Dollar - has helped keep the exchange rate pinned down.

The Pound has also come under pressure from general Brexit concerns and the perception that Theresa May cannot unify her party.  

"Brexit uncertainty continues to hang over GBP, with PM May trying to unify the Conservative Party ..., but lingering skepticism on her chances of success," says Spencer.

However, we do note that concerns over May's leadership of the party have eased somewhat since her address to the Conservative party mid-week which was well received by the rank-and-file membership. Furthermore, the bar to ousting May at this crucial juncture in Brexit negotiations remains high.

We therefore believe market conviction for selling Sterling would have to rely more on how the E.U. behaves with regards to negotiations.

In a separate report, Reuters notes how markets are starting to price in the possibility of bigger moves for Sterling on the horizon, especially after a crunch EU summit in December, which is seen as negotiator's 'last chance saloon' for agreeing a deal in time for Brexit.

'Risk reversals' - a measure of expected future volatility and risk used by those hedging currency exposure, have reached levels similar to the volatility expected during the 2017 snap general election.

Previously the market seemed complacent about further big moves in the Pound.

Expectations of a deal were stronger and the currency was seen as already having priced in 'a lot of bad news', however, this perception appears to have given way to more pessimistic forecasts recently.

"The implied vol premium for GBP put versus GBP call options via risk reversals has been sitting at two-year highs for a couple of weeks on the heightened risk of a sharp GBP fall if Britain leaves the European Union without an agreement," says Richard Pace at Reuters.

The options data suggests hedgers do not expect much chance of a deal being struck at the October 18 summit, but a higher chance of a deal agreed at a November summit and most viewing December 14 as the crunch date for Brexit.

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