British Pound Recovery Firms, Could go Higher against Both Euro and Dollar Short-Term

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- Markets still believe a Brexit deal is in sight

- "We believe the rally in GBP/USD will continue" - Lloyds Bank

- Conservative party conference promises to test Sterling's nerves

The Pound retains a firm footing in mid-week trade as it looks to repair the damage inflicted in the previous week and we are told there remains scope for further gains, even if the atmosphere surrounding the currency is a nervous one.

Foreign exchange price action so far this week suggest a recent negative shift in tone on Brexit negotiations does not yet represent a game-changer, allowing traders to afford Sterling the benefit of the doubt.

"In spite of the increasingly testy atmosphere under which the talks are being conducted, we believe that a deal on the Withdrawal Agreement is more likely than not," says Dean Turner, an Economist with UBS AG.

Ongoing belief that a deal can be done has ensured the Pound-to-Euro exchange rate trades at 1.1194 early on in the mid-week session, having been as low as 1.1118 on Friday, September 21. However, the month low is still some way lower at 1.1046.

Bulls seeking a stronger Sterling will be hoping that the Friday low at 1.1118 represents a low in a broader recovery sequence.

"We expect GBP/EUR to rally towards 1.14 by end-2018 and then gradually decline towards 1.08 at end-2019," says Gajan Mahadevan an analyst with Lloyds Bank in London.

Independent currency strategy consultant Joel Kruger says "he continues to like the idea of selling EUR/GBP as a medium-term play." (i.e. betting on a rise in GBP/EUR).

Reasons for this include technical levels showing the Euro to be elevated while a Brexit deal would fuel a GBP/EUR recovery. And, "rate differential makes this a positive carry... i.e. you get paid to hold," says Kurger.

The Pound-to-Dollar exchange rate meanwhile trades at 1.3146 having been as low as 1.3055 on Friday, September 25. A look at the charts suggests the currency's walk higher remains intact:

"We believe the rally in GBP/USD will continue and expect the currency pair to reach 1.35 by the end of the year. This forecast is predicated on the UK government successfully negotiating a withdrawal deal with the EU in advance of the March 2019 deadline. However, Brexit negotiations pose a significant risk to our central forecast," says Mahadevan.

The views concerning the outcome of Brexit negotiations expressed by Mahadevan are ubiquitous across the market place with most big-name financial institutions such as Goldman Sachs seeing a greater likelihood of a Brexit deal being secured than not.

However, while the base-case in the market place is for talks to succeed, there is a an acknowledgment that until a deal is agreed the prospect for volatility remains high.

"Brexit developments can buck the market at any moment, either way," says Robert Howard, who sits on the foreign exchange desk at Thomson Reuters.

"Fortune may favour the brave, but speculators holding or mulling Sterling longs must be wondering about just how bold they should be as the annual UK Conservative Party conference looms," adds Howard.

The conference starts on Sunday, September 30 and traders will be wary that the Pound has suffered at previous conferences.

Data from Reuters shows the Pound fell 3.75 cents in the first week of October last year, after a disastrous keynote conference speech by PM Theresa May.

"Sterling suffered from May's misfortune, amid perceptions that her hold on power had never looked weaker. A year earlier, the pound fared even worse after May's conference message was perceived as signalling that Britain was heading for a hard Brexit," says Howard.

That first week of October 2016 ended with a "flash crash" for GBP, which saw cable tank to 1.1491 – its lowest for 31 years.

Prime Minister Theresa May is scheduled to speak on the final day, October 3.

So while Sterling is showing resilience, the near-term ride promises to be bumpy.

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